<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
---------- ----------
Commission file number 1-8122 .
--------------
GRUBB & ELLIS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1424307 .
- - ------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Montgomery Street, - Telesis Tower,
San Francisco, CA 94104
------------------------
(Address of principal, executive offices)
(Zip Code)
(415)956-1990
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The aggregate market value of voting common stock held by nonaffiliates of the
registrant as of March 1, 1994 was approximately $12,270,000.
The number of shares outstanding of the registrant's common stock as of March 1,
1994 was 4,060,628 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year (December
31, 1993) are incorporated by reference into part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in its definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
Total Pages:
Exhibit Index:
<PAGE>
GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
PAGE
----
COVER PAGE 1
TABLE OF CONTENTS 2
Part I.
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 8
Item 6. Selected Financial Data 9-10
Item 7. Management's Discussion and Analysis of Financial 11-21
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 22-54
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 55
Part III.
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial
Owners and Management 73
Item 13. Certain Relationships and Related Transactions 76
Part IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 78-83
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES 78
SIGNATURES 84-85
EXHIBIT INDEX 91
2
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GRUBB & ELLIS COMPANY
PART I
ITEM 1. BUSINESS
GENERAL
Grubb & Ellis Company, a Delaware corporation organized in 1980, is the
successor by merger to a real estate brokerage company first established in
California in 1958. Grubb & Ellis Company and its wholly and majority owned
subsidiaries (the "Company") provide real estate services. Such services
include commercial brokerage, residential brokerage, property and facilities
management (through its wholly owned operations and majority owned subsidiary,
Axiom Real Estate Management, Inc. ("Axiom")) and other services which are
offered to real estate owners, investors and tenants. Based on revenue, the
Company is one of the largest commercial real estate services companies in the
United States. Through Axiom, the Company is also one of the largest property
management firms in the country with approximately 75 million square feet of
property under management. Additionally, the Company has for a number of years
provided mortgage brokerage, appraisal, consultation and asset management
services. As of the year ended December 31, 1993, the Company had 105 offices
in 61 cities in 17 states and the District of Columbia, with approximately 1,400
real estate agents, 900 non-agent employees and 1,400 Axiom property management
staff (the cost of the property management staff is substantially reimbursed by
clients). Additionally, the Company maintains informal business relationships
with full-service real estate firms in England, France, Italy, Germany, the
Netherlands, Asia and the Pacific Basin for purposes of client business
referral. In 1992, the Company also formed an alliance for purposes of client
business referral with Mexus Services Corporation ("Mexus"), a firm specializing
in providing consulting services to U.S. firms seeking to do business in Mexico.
In 1993, commercial brokerage was the major source of revenue for the Company,
followed by property management, residential brokerage, and appraisal and
consulting services. The balance of the Company's revenue was derived from real
estate investment advisory and other services. The Company believes that
commercial brokerage is likely to continue to be its major source of revenue for
the foreseeable future.
BUSINESS DEVELOPMENT AND STRATEGY
Having established operations in California, Arizona, Colorado, Washington and
Hawaii from 1958 through 1980, the Company proceeded to develop a national
network of commercial brokerage offices, primarily by purchasing established
real estate services firms in selected markets during the period from 1981
through 1986. The acquisitions have enabled the Company to provide diversified
services to multi-regional and national clients. This strategy also resulted in
a significant increase in the Company's level of fixed costs and overhead. Most
of the acquired companies no longer use their original company names and are
identified solely as Grubb & Ellis Company.
In 1990, in response to adverse real estate market conditions, the Company
closed 15 offices in locations judged to be non-strategic. In 1991, the
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Company closed four additional offices and also sold its Texas residential
operations. In January 1992, the Company sold its Georgia residential
operations, leaving California as its sole focus for residential business at
that time.
In April 1992, the Company reached an agreement with Better Homes and Gardens to
become a residential Area Development Alliance Partner in Southern California.
Under the terms of this agreement, the Company continues to provide residential
services, but national and regional marketing support is provided to both agents
and customers by Better Homes and Gardens.
Effective September 1, 1992, the Company formed Axiom, a property and facilities
management joint venture with International Business Machines Corporation
("IBM"). The purpose of the joint venture is to provide commercial property
management real estate services, third-party and corporate facilities management
on a nationwide basis. The Company holds a 74% interest, and IBM owns 26% of
Axiom. Additional shares of Axiom's common stock have been reserved for the
issuance of equity incentives to management. In connection with the joint
venture, IBM Credit Corporation and Axiom entered into a Master Financing
Agreement under which Axiom borrowed approximately $700,000 and may borrow a
maximum additional amount of approximately $2,050,000. The Company has also
entered into a credit agreement with Axiom pursuant to which Axiom borrowed
approximately $1,550,000. This amount was funded by property management
receivable collections, and the Company has no further obligation to fund
additional amounts to Axiom. As a consequence of the establishment of the joint
venture, IBM added approximately 17 million square feet of management contracts
to the Company's existing portfolio. Effective January 1994, Axiom closed
certain offices pursuant to its strategic objectives, and the Company,
independent of Axiom, resumed property management services in some of those
locations.
From 1990 to late 1992, the Company actively pursued equity financing to
strengthen its liquidity and meet its short- and long-term working capital
needs, as the severe economic recession had hindered its ability to meet debt
principal and interest obligations to The Prudential Insurance Company of
America ("Prudential"). On January 29, 1993, the stockholders of the Company
approved a proposal for restructuring the debt and equity of the Company (the
"Recapitalization"), which involved a cash investment of $12,850,000 by Warburg,
Pincus Investors, L.P., a Delaware limited partnership ("Warburg"), and $900,000
by Joe F. Hanauer ("Hanauer"), a private investor who became Chairman of the
Board of the Company. The investment was made in exchange for convertible
preferred stock and warrants to purchase common stock and the renegotiation of
the Company's indebtedness of approximately $40 million to Prudential, including
the conversion of approximately $15 million of that indebtedness into
convertible preferred stock and warrants to purchase common stock. As a result
of the Recapitalization, and giving effect to the sale of a total of 1,193
shares of preferred stock and 9,570 warrants by Warburg and Hanauer to
Wilbert F. Schwartz, President and Chief Executive Officer of the Company,
Warburg and Hanauer together held approximately 38.9% and Prudential held
approximately 25.6% of the Company's equity on a fully diluted basis but before
exercise of outstanding warrants at December 31, 1993. Upon the possible future
exercise of all outstanding warrants, Warburg and Hanauer together held
approximately 43.3% and Prudential held approximately 24.6% of the Company's
equity on a fully diluted basis at December 31, 1993.
In February 1993, the Company completed the sale of the real estate advisory
business of Grubb & Ellis Realty Advisers, Inc., a wholly owned subsidiary of
the Company, to a privately held concern.
In early March 1993, the Company sold its Northern California residential real
estate brokerage operations. The sale included 13 residential real estate
4
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offices located throughout Northern California as well as a relocation office.
Under the terms of the sale, most of the approximately 400 employees and
salespersons of the Company's Northern California residential operations became
employees of the purchaser. Also, in October 1993, the Company's residential
mortgage services operations in Northern California were closed. Southern
California residential operations currently remain the Company's only
residential brokerage and residential mortgage service operations.
Effective February 1994, the Company closed unprofitable appraisal and
consulting offices in Dallas, Phoenix and Atlanta. Having streamlined its
operations in response to recessionary business conditions and restructured its
capital base, management currently intends to expand its business by focusing
its marketing efforts on coordinating institutional and governmental property
dispositions, enhancing its investment brokerage capabilities, obtaining
additional national accounts as a service provider to major corporations seeking
to outsource real estate services, expanding its property management services,
and providing enhanced support tools and training to its commercial offices
nationwide (see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and Note 1 of Notes to the Consolidated
Financial Statements).
During March 1994, the Company substantially completed negotiations to amend its
debt agreements with Prudential to modify certain financial covenants and defer
principal payments. The agreements also provide a financing commitment from
Warburg for a $10 million interim loan which is expected to be retired in
connection with a proposed sale of rights to acquire common stock of the Company
(see Notes 1 and 5 of Notes to the Consolidated Financial Statements).
LINES OF BUSINESS (See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".)
COMMERCIAL BROKERAGE
The Company acts as a sales or leasing agent for commercial properties, which
include office, industrial, retail and hotel properties, as well as undeveloped
land. Properties range in size and type from single, free-standing locations to
multi-level, mixed-use projects. Offices are typically located in or near major
metropolitan areas. In 1993, the Company realigned its previous six-region
structure to form four commercial brokerage regions: Pacific Southwest
(Southern California and Arizona); Pacific Northwest (Washington, Oregon and
Northern California); Midwest/Texas (Colorado, Illinois, Michigan, Ohio and
Texas); and Eastern (Connecticut, Florida, Georgia, Massachusetts, New York, New
Jersey, Pennsylvania, Virginia and Washington D.C.). Effective March 1994, to
enhance operating efficiencies and reduce expenses, the Company reorganized its
operations into three regions from four regions, combining its Midwest/Texas and
Eastern regions under the direction of one regional president. Commercial
brokerage comprised approximately 72% of the Company's total revenue for the
year ended December 31, 1993. At December 31, 1993, the Company had
approximately 1,030 commercial salespersons.
The majority of commercial brokerage salespersons, who are primarily leasing
agents, focus their activities on one type of commercial property (office,
industrial or retail) in a specific market area. Most of the Company's other
commercial salespersons broker the sale of commercial investment property or
undeveloped land. Most salespersons are independent contractors with the
Company, although in certain offices, salespeople are hired as employees.
5
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RESIDENTIAL BROKERAGE
The Company's residential brokerage operations are focused on sales of homes in
higher-priced neighborhoods located in Southern California. The Company also
provides relocation services through its network of offices and through
membership in two national residential referral associations. Commissions from
residential brokerage constituted approximately 10% of the Company's total
revenue for the year ended December 31, 1993. The Company had 11 residential
brokerage offices in Southern California with approximately 360 residential
salespersons at December 31, 1993.
Since 1989, the Company has emphasized its mortgage origination capability from
its residential offices through Grubb & Ellis Mortgage Services, Inc. ("GEMS"),
a wholly owned subsidiary of the Company engaged in residential mortgage
brokerage activities. By year-end 1993, these activities continued solely in
Southern California.
MANAGEMENT AND CONSULTING SERVICES
In 1993, management and consulting services included the Company's property
management operations, appraisal, consulting, and asset services.
PROPERTY MANAGEMENT
Substantially all of the Company's facilities and property management services
are conducted through Axiom, which managed approximately 75 million square feet
of property, including approximately 24 million square feet of IBM facilities as
of December 31, 1993.
The Company provides property and facilities management services to owners of
office, retail, industrial and multi-family residential real estate. These
services include tenant relations, facilities and construction management,
financial reporting and analysis, and engineering consultation. Property
management clients include pension funds, developers, financial institutions,
corporate and individual owners and syndicators. The principal markets for the
Company's property management services are in Connecticut, Colorado, Georgia,
Illinois, New Jersey, New York, Ohio, Pennsylvania, and Washington, D.C.
Property and facilities management fees constituted approximately 11% of the
Company's total revenue for the year ended December 31, 1993.
APPRAISAL AND CONSULTING
The Company offers appraisal and consulting services through offices in
California, Colorado, Illinois, Ohio and New York. Most of these offices are
located within commercial brokerage services offices. Appraisal and consulting
services primarily include valuation of single properties and real estate
portfolios, expert witness testimony, market and feasibility studies and
investment analysis.
ASSET SERVICES
Grubb & Ellis Asset Services Company ("GEASC"), a wholly owned subsidiary of the
Company, was formed to coordinate the delivery of the Company's services to
federal agencies and financial institutions with troubled real estate assets.
The subsidiary is also responsible for overseeing the Company's auction
partnership with the Ross-Dove Company and overseeing and assuring compliance
with rules and regulations that must be observed by firms offering services to
federal agencies. Prior to September 1993, the Company and its subsidiary,
Grubb & Ellis Asset Services Company ("GEASC"), provided services to the
Resolution Trust company (the "RTC") and the Federal Deposit Insurance
Corporation (the "FDIC"). As a result of Prudential's current stock ownership
6
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and certain of its rights under the Stockholders' Agreement, Prudential may be
deemed to be a related entity to the Company under RTC regulation. The Company,
upon learning that Prudential was party to a lawsuit with the FDIC, voluntarily
refrained from entering into new RTC contracts on the basis that if Prudential
is deemed to be a related party with the Company, the existence of the lawsuit
might impair the Company's and GEASC's ability to contract with the RTC and the
FDIC.
OTHER SERVICES
Other revenue is derived from commercial mortgage brokerage operations and from
the Company's partnership and joint venture activities. Partnership and joint
venture activities are not a significant portion of the Company's business, and
the Company does not anticipate expansion of activity in this area.
COMPETITION
Although the Company ranks among the largest national commercial real estate
services organizations in the United States in terms of revenue, the real estate
brokerage industry is fragmented and highly competitive. Thus, the Company's
most significant competition in a particular market may be one or both of the
other two national firms, and/or regional and local firms, in any combination.
In addition, companies not previously engaged primarily in the real estate
services business, but with substantial financial resources, now provide real
estate or real estate-related services. For example, certain insurance
companies, Wall Street investment firms and major real estate developers
participate in more traditional commercial brokerage activities. As a result of
the recessionary economy and depressed real estate markets in much of the
country, a number of real estate services firms have decreased their size and/or
left the business entirely during the last three years. Real estate companies
may compete on the pricing of services, service delivery capability (for
example, the ability to deliver multiple services to a client or the ability to
deliver the same services in a number of different markets) and/or proven record
of success.
ENVIRONMENTAL REGULATIONS
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules and zoning restrictions which have
impacted the management, development and/or sale of real estate. Additionally,
new or modified regulations could develop in a manner which have not, but could,
adversely affect the Company's commercial brokerage and property management
operations. The Company believes it is in compliance in all material respects
with all environmental laws or regulations applicable to its operations.
SEASONALITY
The Company has typically experienced its lowest quarterly revenue in the first
quarter of each year with higher and more consistent revenue in the second and
third quarters. The fourth quarter has historically provided the highest
quarterly level of revenue due to increased activity caused by the desire of
clients to complete transactions by year-end. However, quarterly revenue
variations have not been significant over the last three years. Revenue in any
given quarter, as a percentage of total annual revenue, ranged from a high of
29.2% to a low of 19.8%, as adjusted to eliminate the effect of sold operations.
ITEM 2. PROPERTIES
7
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Inapplicable.
ITEM 3. LEGAL PROCEEDINGS
The information called for by Item 3 is included in Note 9 of Notes to the
Consolidated Financial Statements under Item 8 of this Report, which Note is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets for the Company's common stock are the New York and
Pacific Stock Exchanges. The following table sets forth the high and low sales
prices of the Company's common stock on the New York Stock Exchange for each
quarter of 1993 and 1992, as restated to reflect the one-for-five reverse stock
split which occurred January 29, 1993 (see Notes 1 and 5 of Notes to the
Consolidated Financial Statements).
<TABLE>
<CAPTION>
1993 1992
------------------------- --------------------------
High Low High Low
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
First Quarter $ 8 $ 1 7/8 $ 12 1/2 $ 6 7/8
Second Quarter 5 7/8 3 3/8 10 5/8 6 1/4
Third Quarter 4 1/2 2 3/4 8 1/8 5
Fourth Quarter 3 5/8 2 5/8 6 1/4 4 3/8
</TABLE>
As of March 1, 1994, there were 2,563 registered holders of the Company's common
stock.
No cash dividends were declared on the Company's common or preferred stock in
1993 or 1992.
Any dividend payments with respect to the common stock will be subject to the
restrictions in certain debt agreements with Prudential. The agreements
restrict the payment of cash dividends on and repurchases of the Company's
common stock, depending upon the amount of the consolidated net income of the
Company during designated periods.
8
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ITEM 6. SELECTED FINANCIAL DATA
Five-year Comparison of Selected Financial and Other Data for the Company
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------
(in thousands except per share amounts and shares)
--------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 201,724 $ 224,163 $ 268,634 $ 321,360 $ 362,030
Net (loss) income $ (18,208) $ (59,676) $ (49,297) $ (29,751) $ 521
Undeclared dividends
(accretion of liquid-
ation preference)
on preferred stock $ (2,196) -- -- -- --
Net (loss) earnings
applicable
to common stockholders $ (20,404) $ (59,676) $ (49,297) $ (29,751) $ 521
(Loss) earnings per
common shares
and equivalents $ (5.08) $ (3.40) $ (2.95) $ (1.82) $ 0.03
Weighted average
common shares and
equivalents 4,019,795 17,546,513 16,682,858 16,389,526 16,364,763
Cash dividends per
common share -- -- -- -- --
Retroactive effect of
one-for-five reverse
stock split as a result
the January 29, 1993
Recapitalization (see
Notes 1 and 5 to the
Consolidated Financial
Statements):
(Loss) earnings per
common share and
equivalents $ (5.08) $ (17.01) $ (14.77) $ (9.08) $ 0.16
Weighted average
common shares
and equivalents 4,019,795 3,509,303 3,336,572 3,277,905 3,272,953
</TABLE>
Loss and per share data reported on the above table reflect expenses related to
special charges and unusual items in the amounts of $13.5 million in 1993, $44.9
million in 1992, $37.0 million in 1991 and $18.0 million in 1990. See
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
9
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Five Year Comparison of Selected Financial and Other Data for the Company
<TABLE>
<CAPTION>
At December 31
--------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(in thousands except per share amounts, shares and staff data)
<S> <C> <C> <C> <C> <C>
Total assets $ 42,185 $ 44,672 $ 81,805 $ 126,982 $ 159,460
Working capital
(deficit) $ (17,842) $ (33,273) $ 3,523 $ 12,591 $ 25,264
Long-term liabilities $ 30,648 $ 36,370 $ 44,015 $ 43,994 $ 44,361
Redeemable convertible
preferred stock $ 29,900 -- -- -- --
Common stockholders'
equity (deficit) $ (68,867) $ (51,458) $ 6,466 $ 55,531 $ 84,110
Book value per
common share $ (16.96) $ (2.86) $ 0.39 $ 3.35 $ 5.19
Common shares
outstanding 4,060,271 18,007,481 16,758,016 16,564,858 16,221,563
Total staff 3,720 4,602 5,089 6,737 7,058
Retroactive effect of one
-for -five reverse stock
split as a result of
the January 29,
1993 recapita-
lization (see Notes 1 and
5 to the Consolidated
Financial Statements):
Book value per
common share $ (16.96) $ (14.29) $ 1.93 $ 16.76 $ 25.93
Common shares
outstanding 4,060,271 3,601,496 3,351,603 3,312,972 3,244,313
</TABLE>
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's business and financial condition during the past four years has
been substantially impaired due to the general economic recession and a severe
decline in activity levels and prices within the commercial and residential real
estate sector. During 1993, the Company's revenue was derived substantially
from commercial brokerage activities. Property management, residential,
appraisal, consulting and other real estate services fees provided the majority
of the remaining revenue. The decrease in 1993 revenue from 1992 levels was due
to the sale of the Company's real estate advisory business and Northern
California residential brokerage operations in February and March of 1993,
respectively.
In 1993, the Company continued to downsize and restructure its operations to
lower costs in response to the new management's strategic direction for the
Company. Special charges and unusual items, relating primarily to downsizing
and restructuring, amounted to $13.5 million in 1993. This amount is comprised
of $10.1 million related to the write-off of goodwill, $2.9 million related to
severance and costs, and $500,000 of other items.
On January 29, 1993, the Company's stockholders approved and the Company closed
a restructuring of its debt and equity with Warburg, Hanauer and Prudential (the
"Recapitalization"). The Recapitalization included a one-for-five reverse stock
split and reduction in the par value of the common stock from $1.00 to $.01 per
share (see Notes 1 and 5 of Notes to the Consolidated Financial Statements).
11
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LINES OF BUSINESS
The following table shows revenue and operating loss by line of business for the
years ended December 31, 1993, 1992 and 1991 and identifiable assets for the
years ended December 31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
(1) (2) (3)
Brokerage Other
Operations Operations Corporate Consolidated
---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
1993
Revenue $173,266 $ 27,858 $ 600 $201,724
Operating Loss (8,125) (2,328) (7,755) (18,208)
Identifiable Assets 11,930 5,641 24,614 42,185
1992
Revenue 195,532 28,183 448 224,163
Operating Loss (18,896) (10,270) (30,510) (59,676)
Identifiable Assets 24,935 4,135 15,602 44,672
1991
Revenue 235,791 30,953 1,890 268,634
Operating Loss (37,367) (523) (11,407) (49,297)
<FN>
(1) Includes commercial and residential real estate, and mortgage brokerage
services. The operating loss amounts include special charges and unusual
items in the amounts of $10.3 million in 1993, $14.5 million in 1992, and
$33.3 million in 1991.
(2) Includes property management, construction management, appraisal and
consulting, and real estate asset management and advisory services. The
operating loss amounts include special charges and unusual items in the
amounts of $1.8 million in 1993, $7.9 million in 1992, and $703,000 in
1991.
(3) Includes corporate administration, investments in property partnerships and
joint ventures, and interest income and expenses. The operating loss
amounts include special charges and unusual items in the amounts of $1.4
million in 1993, $22.5 million in 1992, and $3.0 million in 1991.
</TABLE>
1993 COMPARED TO 1992
REVENUE
Total 1993 revenue was $201.7 million, a decrease of 10.0% from $224.2 million
in 1992. The decrease was the result of the sales of the Northern California
residential brokerage operations and real estate advisory services during the
first quarter of 1993. Excluding these operations, revenue was $198.3 million
in 1993 compared to $188.9 million in 1992, representing an increase of 5.0%
from 1992.
Revenue from commercial brokerage offices increased in 1993 by $4.9 million or
3.5% from 1992. This is the first year-to-year increase in revenue from the
commercial brokerage operations since 1988. Increases in revenue occurred in
the Midwest/Texas, Eastern and Pacific Southwest regions, offset by a decline in
revenue in the Pacific Northwest region.
12
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The Company's residential brokerage business reported a decline in revenue of
$28.7 million or 58.2% from 1992, due to the sale of the Company's Northern
California residential brokerage business. The Northern California residential
brokerage operations contributed $3.4 million to 1993 revenue compared to
revenue of $33.1 million in 1992. Revenue from the remaining Southern
California residential brokerage operations increased by 6.0% to $17.2 million
from 1992. The increase in revenue was attributable to increased residential
buyer activity resulting primarily from lower interest rates during 1993.
Revenue from mortgage brokerage operations increased $1.6 million or 22.7% in
1993 as compared to 1992. Revenue from commercial mortgage brokerage operations
increased by approximately $700,000 or 29.6% from 1992, and residential mortgage
brokerage revenue increased approximately $900,000 or 19.2% from 1992.
COSTS AND EXPENSES
Real estate brokerage commissions and other commission expense (salespersons'
participation) is the Company's major expense and is contingent upon gross
brokerage commission revenue levels. Salespersons' participation expense as a
percentage of revenue decreased from 52.3% in 1992 to 49.7% in 1993. The
decrease in participation as a percentage of revenue is primarily the result of
the sale of the Northern California residential brokerage operations.
Total operating expenses, other than salespersons' participation expense, of
$119.1 million for 1993 decreased by 28.3% from $166.1 million in 1992. The
decrease in expenses primarily resulted from a decrease in special charges and
unusual items (see discussion below) to $13.5 million in 1993 from $44.9 million
incurred in 1992. Additionally, expenses decreased in 1993 as compared to 1992
as a result of the sales of the Northern California residential brokerage
operations and real estate advisory operations. Total operating expenses,
excluding expenses from the real estate advisory operations and Northern
California residential brokerage operations, and the special charges and unusual
items, decreased by 3.8% or $4.1 million from 1992. This reduction in operating
expenses is attributable to management's continued effort to aggressively reduce
fixed overhead expenses by closing unprofitable field offices and streamlining
operations.
Special charges and unusual items were first incurred in 1990 in an effort to
reposition the Company to operate more efficiently in response to recessionary
market conditions. The continued weakening in certain sectors of the real
estate economy since 1989 had resulted in further decreased revenue. During late
1992 and early 1993, the Company completed the Recapitalization and retained a
new executive management team. New management reevaluated the Company's
business strategy and determined that a variety of restructuring and
recapitalization efforts were necessary in order for the business to continue as
a going concern. These restructuring efforts have included downsizing
operations and focusing the Company's activities on its core business functions,
as well as realigning the operational structure into a more centralized
operation with less middle management. Recapitalization efforts have included
the restructuring of the Company's debt and the infusion of cash by Warburg and
Hanauer (see Notes 1 and 5 of Notes to the Consolidated Financial Statements).
Other restructuring plans include additional investments in training, computer
systems and other resources which are expected to improve future profits.
13
<PAGE>
The Company's evaluation of the carrying value of goodwill for 1991, 1992 and
1993 was significantly impacted by a continuation of the recessionary cycle and
the severe downturn in the real estate markets. Goodwill associated with
certain acquisitions was written down in 1991 and 1992 because the Company's
analysis of the future activity of those operations indicated permanent
impairment; these entities were acquired during a period of rapid expansion
during the 1980's when real estate activity was at increased levels and profit
margins were substantially higher than those found in the market today. In
1990, in response to adverse real estate market conditions, the Company closed
15 offices in locations judged to be non-strategic. In 1991, the Company closed
four additional offices and also sold its Texas residential operations. In
January 1992, the Company sold its Georgia residential operations, leaving
California as its sole focus for residential business at that time. As of
December 31, 1992, all of the remaining unamortized goodwill was associated with
the commercial brokerage operation. The Company's analysis of goodwill
performed in the fourth quarter of 1993 indicated that the commercial brokerage
business would operate at a loss without the planned restructuring and
recapitalization efforts and would, therefore, be unable to recover goodwill.
Accordingly, the remaining goodwill was written off as of December 31, 1993.
As part of new management's comprehensive reevaluation of the Company's business
strategy discussed above, as of December 31, 1993, the Company determined that
it will close certain offices and terminate certain employees. Accordingly, as
of December 31, 1993, the Company has accrued for the expected costs that result
from this strategic decision. Based on historical operating results, the Company
expects that future operating results will be positively impacted by
approximately $1.7 million per annum as a result of restructuring. The Company
began implementation of these restructuring efforts during the first quarter of
1994, and expects them to be substantially complete by December 31, 1994. The
related lease termination and other miscellaneous office closing costs, net of
expected sublease income, have been accrued. Approximately $3.5 million of
these costs, comprised primarily of lease costs and severance, are expected to
be paid in cash (net of amounts expected to be received in cash), while $443,000
represents non-cash write-downs and write-offs of equipment and leasehold
improvements and other asset and liability balances. Severance costs are
expected to be paid during 1994 and 1995, while office closure costs, net of
expected sublease income, are expected to be incurred over the next eight years
(see Note 9 of Notes to the Consolidated Financial Statements regarding expected
future minimum lease obligations and sublease income). The funding of these
cash requirements is expected to come from the new Warburg loan commitment and
subsequent rights offering (see Note 1 of Notes to the Consolidated Financial
Statements), and cash flow from operations.
Consequently, in response to management's strategy discussed above, special
charges and unusual items of $13.5 million and $44.9 million were recorded in
the fourth quarters of 1993 and 1992, respectively. The 1993 charges include
goodwill write-off of $10.1 million, office closure and severance costs of $2.9
million, and other charges of $500,000. The 1992 charges include $16.2 million
in reserves for legal claims and settlements which did not recur in 1993 (see
Note 10 of the Notes to Consolidated Financial Statements). Payments made in
1993 against this reserve did not have a material adverse effect on the
Company's financial condition or results of operations.
14
<PAGE>
INCOME TAXES
The 1993 provision for income taxes is $575,000 compared with $605,000 in 1992.
The provision relates to state and local taxes assessed on profitable
subsidiaries of the Company.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 109, Accounting for Income Taxes, which was issued in
February, 1992. SFAS No. 109 supersedes SFAS No. 96, Accounting for Income
Taxes, which was adopted by the Company in January, 1987, and changes the
criteria for recognition and measurement of deferred tax assets. As permitted
under the Statement, the Company has elected not to restate the financial
statements of prior quarters. The cumulative effect of the change and the
effect of the change on pretax income for the year ended December 31, 1993 is
not material.
NET LOSS
The net loss for 1993 was $18.2 million compared to a net loss of $59.7 million
for the previous year. Net loss per common share was $5.08 in 1993 compared to
a net loss per common share of $17.01 in 1992, giving effect to the one-for-five
reverse stock split resulting from the Recapitalization. Losses in 1993 and
1992 were primarily the result of the special charges and unusual items of $13.5
million and $44.9 million, respectively.
STOCKHOLDERS' DEFICIT
During 1993, stockholders' deficit increased by $17.4 million from 1992 and book
value decreased from $(14.29) per common share, giving effect to the one-for-
five reverse stock split, to $(16.96) per common share, as a direct result of
the loss from operations and special charges and unusual items.
1992 COMPARED TO 1991
REVENUE
From 1989 through 1992, the Company experienced a continual decline in revenue,
substantially as a result of the severely depressed real estate market. Revenue
decreased in 1992 by 16.5% or $44.4 million from $268.6 million in 1991 to
$224.2 million in 1992. Revenue from the brokerage line of business decreased
from 1991 by 17.1% or $40.3 million due primarily to the sale of the Company's
Texas and Georgia residential brokerage operations in mid-1991 and early 1992,
respectively.
Commercial brokerage revenue for 1992 decreased from 1991 by $2.5 million or
1.8%. Increases in commercial real estate brokerage revenue from 1991 occurred
in the Midwest, Eastern and Texas regions, which were offset by declines in
revenue in the Western region.
The Company's residential brokerage business reported an overall decline in
revenue of 41.1% or $37.7 million from 1991 due to the sale of the Company's
Texas and Georgia residential brokerage operations. These operations
contributed $38.2 million of revenue during 1991. California residential
brokerage revenue of $54.0 million increased by $487,000 or 0.9% from 1991.
This increase was attributable to residential mortgage brokerage operations
which contributed $4.2 million of revenue during 1992, an increase of 33.2% or
$1.1 million from 1991. The improved revenue from residential mortgage
15
<PAGE>
brokerage operations was due to increased activity in the refinancing of
residential mortgages resulting from record low interest rates. The Northern
California residential real estate brokerage operations, which were sold during
March 1993, contributed $33.1 million in revenue in 1992 and $31.3 million in
revenue in 1991.
Revenue in 1992 from other lines of business was $2.8 million or 8.9% less than
in 1991. Declines in revenue were primarily a result of decreased property
management and appraisal and consulting fees. Property management revenue
declined due to a reduction in the number of properties under management. The
decrease in appraisal and consulting revenue was primarily due to a
reorganization and consolidation of operations in the New York appraisal office,
which resulted in fewer appraisal staff and clients in that market.
1992 corporate revenue decreased from 1991 by $1.4 million due to declines in
interest income, as less cash was available for investment at lower interest
rates, as well as to decreases in income from partnerships and joint ventures.
COSTS AND EXPENSES
Salespersons' participation expense as a percentage of revenue increased from
51.5% in 1991 to 52.3% in 1992. The increase in participation as a percentage
of revenue was primarily the result of a decision by management to freeze the
1991 year-end commission brackets for top producers in order to improve
retention.
Total operating expenses of $283.2 million for 1992 decreased by 10.8% from
$317.5 million in 1991. Expenses related to the Texas and Georgia residential
brokerage operations were $36.9 million in 1991. Total operating expenses,
excluding expenses from the Texas and Georgia residential brokerage operations
and the special charges and unusual items (discussed below), decreased by 2.2%
or $5.3 million. This reduction in operating expenses was attributable to
closing unprofitable field offices and streamlining operations in response to
declines in revenue.
Operating expenses from the brokerage line of business decreased in 1992 from
1991 by $58.7 million, primarily as a result of the sales of Texas and Georgia
residential operations. Additionally, special charges and unusual items of
$14.5 million and $33.3 million were included in brokerage operating expenses in
1992 and 1991, respectively (see discussion below). Operating expenses,
excluding expenses from Texas and Georgia residential, and excluding special
charges and unusual items, decreased in 1992 by $3.0 million or 1.5% from 1991.
Operating expenses from other lines of business increased from 1991 by $7.0
million or 22.2% due to increases in special charges and unusual items of $7.2
million over 1991 (see discussion below).
In 1992, corporate expenses increased from 1991 by $17.5 million. The increase
consisted of $22.5 million in special charges and unusual items (discussed
below), offset in part by decreases in other operating expenses during 1992 of
$2.3 million or 22.4% from 1991.
16
<PAGE>
Management's strategy resulted in special charges and unusual expense items of
$44.9 million in the fourth quarter of 1992 and $37.0 million in 1991. In 1992,
these charges included reserves of $2.8 million for the continued decline in net
realizable value of properties held in joint ventures and partnerships, and
office closure and severance costs of $6.1 million. These charges also included
goodwill write-down of $18.9 million due to permanent value impairment of
certain acquisitions made from 1982 to 1986. The $18.9 million goodwill write-
down in 1992 relates to ten entities which were determined to have suffered
permanent impairment of value due to significant changes in the operating
environments of the entities and the current strategic plans and direction of
management. In 1991, these charges included reserves of $2.8 million for the
decline in value of properties held in joint ventures and partnerships, office
closure and severance costs of $4.4 million, and $29.5 million of goodwill
write-down. The $29.5 million goodwill write-down in 1991 includes $8.3
million in goodwill of three entities for which the conclusion was reached
during the fourth quarter of 1991 that closure or spin-off was appropriate, and
$21.2 million in goodwill for six entities for which impairment was indicated at
December 31, 1991. The determination of impairment of goodwill was based upon
an evaluation of deteriorating operating results, future business plans and
budgets, economic projections for the real estate industry, and an evaluation of
various non-financial data. Additionally, the 1992 special charges and unusual
items include $16.2 million in reserves for claims and settlements in connection
with several significant lawsuits as well as potential professional liability
exposure arising from the Company's salesforce (see Notes 9 and 10 of the Notes
to Consolidated Financial Statements). Other charges of $900,000 and $270,000
were recorded in 1992 and 1991, respectively.
INCOME TAXES
The 1992 provision for income taxes is $605,000 compared with $445,000 in 1991.
The provision relates to state and local taxes assessed on profitable
subsidiaries of the Company.
NET LOSS
The net loss for 1992 was $59.7 million compared to a net loss of $49.3 million
for the previous year. Net loss per common share was $3.40 in 1992 compared to
a net loss per common share of $2.95 in 1991. Giving effect to the one-for-five
reverse stock split resulting from the Recapitalization, net loss per common
share was $17.01 in 1992 compared to a net loss per common share of $14.77 in
1991. Losses in 1992 and 1991 were primarily the result of the special charges
and unusual items of $44.9 million and $37.0 million, respectively.
The 1992 operating loss from the brokerage operations was $18.9 million compared
to a 1991 loss of $37.4 million. The 1992 operating loss was attributable to
special charges and unusual items (discussed above) of $14.5 million, as well as
to continued declines in revenue from commercial and residential real estate
brokerage operations. The operating loss of $37.4 million in 1991 included
$33.3 million in special charges and unusual items (discussed above).
Operating losses from the Company's other lines of business were $10.3 million
in 1992 compared to $523,000 in 1991. The 1992 loss was due to approximately
17
<PAGE>
$7.9 million in special charges as well as declines in property management and
appraisal and consulting fees (all discussed above).
LIQUIDITY AND CAPITAL RESOURCES
During 1993, the working capital deficit decreased to a deficit of $17.8 million
from a deficit of $33.3 million at December 31, 1992, primarily attributable to
the Recapitalization.
Adjustments to reconcile net loss to net cash used by operating activities in
1993 include a write-down of goodwill of $10.1 million, $2.9 million of office
closure and severance costs, $500,000 of other special charges and unusual
items, $2.3 million of depreciation and amortization charges, a $3.9 million
decrease in real estate brokerage commissions receivable, and a $2.4 million
increase in other asset accounts. The Company realized cash proceeds of
approximately $2.2 million from the sale of the Northern California residential
operations, approximately $1.2 million from the sale of the real estate advisory
operation, and approximately $400,000 from the sale of various properties owned
by partnerships in Texas in which the Company has interests.
Real estate brokerage commissions receivable, net of salespersons' participation
and allowance for uncollectible accounts, decreased approximately $3.9 million
as of December 31, 1993 compared to December 31, 1992, a result of increased
collections of outstanding receivables, and the write-off of receivables the
Company deems no longer collectible.
In November 1986, the Company received $35 million from the sale of $10 million
in Senior Notes and $25 million in Subordinated Notes to Prudential.
Additionally, in February 1991, the Company fully utilized a $5 million, two-
year revolving line-of-credit from Prudential (the "1991 Revolving Line of
Credit") which was due February 1993. On January 29, 1993, in connection with
the Recapitalization, Prudential canceled $15 million of the outstanding
Subordinated Notes in exchange for 150,000 shares of 5% Junior Convertible
Preferred Stock and warrants exercisable for 200,000 shares of common stock at
an exercise price of $5.50 per share (giving effect to the reverse stock split).
Prudential also canceled the remaining $10 million of Subordinated Notes in
exchange for $10 million of 10.65% Payment-In-Kind notes, which were reduced to
approximately $9,080,000 when Prudential exercised its warrants to purchase
397,549 shares of common stock at an exercise price of $7.30 (giving effect to
the reverse stock split). Approximately $1,982,000 of accrued interest payable
to Prudential was also canceled in conjunction with the exercise of this
warrant. The 1992 $2 million principal payment on $10 million of Senior Notes
was deferred until 1995 and 1996. During 1993, Prudential allowed a deferral of
the $2 million payment due November 1, 1993, until May 1, 1994. Additionally,
the $5 million 1991 Revolving Line of Credit was exchanged for a $5 million
Revolving Credit Note due December 31, 1994, exchangeable for a two-year term
loan due December 31, 1996. The debt agreements with Prudential limit the
Company's ability to pay dividends and contain additional restrictions on the
making of acquisitions, loans, investments, debt and sales of assets. The
Company is also required to maintain a defined working capital ratio. As of
December 31, 1993, the Company did not meet the ratio requirement, and was in
violation of certain other covenants. However, Prudential provided a waiver of
these covenants as of December 31, 1993.
18
<PAGE>
Also in connection with the Recapitalization, the Company issued to Warburg and
Hanauer 137,160 shares of 12% Senior Convertible Preferred Stock, five-year
warrants to purchase 500,000 and 200,000 shares of common stock at exercise
prices of $5.00 and $5.50 per share, respectively, and five-year warrants to
purchase up to 400,000 shares of common stock, which become exercisable at a
formula price only in the event the Company incurs a defined liability in excess
of $1.5 million ("contingent warrants"), all in exchange for $13,750,000 in
cash. On July 1, 1993, Warburg and Hanauer sold 1,193 shares of Senior
Convertible Preferred Stock, five-year warrants to purchase 4,350 and 1,740
shares at $5.00 and $5.50 per share, respectively, and contingent warrants to
purchase 3,480 shares of common stock to Wilbert F. Schwartz, President and
Chief Executive Officer of the Company. See Notes 5 and 9 of Notes to the
Consolidated Financial Statements regarding Company liabilities for other debt
and lease obligations which mature at various dates.
During March 1994, the Company substantially completed negotiations to amend its
debt agreements with Prudential to modify certain financial covenants and defer
principal payments. The agreements also provide a financing commitment from
Warburg for a $10 million interim loan which is expected to be retired in
connection with a proposed sale of rights to acquire common stock of the
Company.
The Company, Warburg and Prudential have entered into an agreement in principle
(the "Agreement") pursuant to which the existing Prudential debt agreements were
amended to provide that the Company will not be required to make principal
payments on any of the Prudential debt prior to November 1, 1997. Thereafter,
the revolving credit facility will mature on November 1, 1999, principal on the
Senior Note will be payable in two equal installments on November 1, 1997 and
1998, and principal on the PIK Notes will be payable in two approximately equal
installments on November 1, 2000 and 2001. The interest rate on the PIK Notes
will increase from 10.65% to 11.65% per annum on January 1, 1996. In addition,
certain covenants of the debt agreements remain in place, but will not be in
effect until April 1, 1997. The debt agreements, as amended, provide for
supplemental principal payments commencing July 1, 1998 if the Company meets
certain financial tests.
Warburg has agreed to loan the Company up to $10 million at an initial interest
rate of 5% per annum with a maturity date of April 28, 1995. The interest rate
will increase to 10% per annum in the event that stockholder approval of certain
of the transactions contemplated by the Agreement is not obtained. Interest on
the loan will be due upon maturity or upon refinancing, whichever occurs first.
The loan will be secured by the Company's commercial brokerage revenues through
a cash collateral account. Prudential also will have a lien on the cash
collateral account which will be subordinated to Warburgs's loan.
The Agreement also provides for the Company to seek additional equity capital
through a rights offering, and contemplates that the Company would issue to
holders of the Company's common stock, for each share of common stock, a non-
transferable right to acquire one share of Company common stock at an exercise
price tentatively set at $2.375 per share. Subject to certain conditions,
stockholders also would have certain rights to oversubscribe to the extent that
other stockholders do not subscribe. Warburg has agreed to acquire the rights
not acquired by the holders of common stock in the rights offering
19
<PAGE>
through the conversion of its loan up to an amount not exceeding $10 million
plus accrued interest on the loan. Pursuant to the Agreement, the rights
offering would occur after the Company obtains the approval of the transactions
contemplated by the Agreement from the holders of a majority of the shares of
the Company's voting stock, including a majority of the holders of the shares of
the Company's voting stock other than Warburg and Prudential. Accordingly,
there can be no assurance that such approval will be obtained.
The Agreement also contemplates certain amendments to the existing Senior
Convertible Preferred Stock held by Warburg and the Junior Convertible Preferred
Stock held by Prudential. Both series of preferred stock would be amended to be
nonredeemable. As of the date of the rights offering, the exercise prices on
the outstanding warrants held by Prudential and Warburg would be reduced to
$3.50 per share pursuant to the terms of such warrants, except that the exercise
price on the contingent warrants to purchase 370,566 shares held by Warburg,
which are exercisable only under specified circumstances, would be reduced to
the same price per share as the rights offering. As it relates to the rights
offering, Warburg will retain certain anti-dilution rights with respect to the
preferred stock and warrants which it currently holds. Thereafter, the
preferred stock and warrants held by Warburg would be amended to eliminate the
anti-dilution provisions with respect to the issuance of common stock and common
stock equivalents at less than the conversion price or exercise price.
The preferred stock and the outstanding warrants held by Prudential would be
amended to eliminate the anti-dilution provisions with respect to the issuance
of common stock and common stock equivalents at less than the conversion price
or exercise price. The Junior Convertible Preferred Stock also would be amended
to increase the dividend rate to 10% per annum effective January 1, 2002, with
further increases of 1% per year effective January 1, 2003 and January 1, 2004
and 2% per year effective January 1, 2005 and each January 1 thereafter. The
Senior Convertible Preferred Stock would be amended to provide that at such time
as the dividend rate on the Junior Convertible Preferred Stock would increase
above 12%, the dividend rate on the Senior Convertible Preferred Stock would
increase by the same amount as the dividend rate on the Junior Convertible
Preferred Stock. The Junior Convertible Preferred Stock also would be amended
to provide that under certain circumstances following the conversion of the
Senior Convertible Preferred Stock holders of the Junior Convertible Preferred
Stock will be obligated to convert such preferred stock.
In consideration of their agreements, the Company would grant Warburg and
Prudential warrants to purchase approximately 325,000 and 150,000 shares of
common stock of the Company, respectively. The exercise price of these warrants
would be equal to the rights offering price. At the conclusion of the
transactions, depending on the level of stockholder participation in the rights
offering, Prudential's equity interest in the Company could decline to under 19%
and Warburg's equity interest in the Company could increase to over 52% on a
fully diluted basis.
The Company intends to meet its short- and long-term cash requirements from
operating cash flow, use of the interim financing, seasonal use of the
Prudential $5 million Revolving Credit Note and, assuming the Company obtains
the required shareholder approval, the subsequent sale of rights to acquire
common stock in the Company. While the Company's full-year operating plan for
20
<PAGE>
1994 anticipates positive operating cash flow, the Company was unable to
generate positive operating cash flow during 1993 or 1992 despite plans to the
contrary. If the 1994 operating plan is not substantially achieved because of
adverse economic conditions or other unfavorable events, the Company may find it
necessary to further reduce expense levels, or undertake other actions as may be
appropriate. In such event, the Company anticipates that its ability to raise
financing on acceptable terms would be severely limited and there can be no
assurance that the Company would be able to raise additional financing.
DIVIDENDS
Any dividend payments on the common stock will be subject to restrictions on the
payment of dividends in the Prudential debt agreements and the payment of all
accrued and unpaid dividends on the Preferred Stock.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Grubb & Ellis Company
We have audited the accompanying consolidated balance sheets of Grubb & Ellis
Company and Subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. Our audits also included the financial
statement schedules for 1993 and 1992 listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the financial
statements of Axiom Real Estate Management, Inc., a 74% owned subsidiary, which
statements reflect total assets of $5,837,845 and $3,856,419 as of December 31,
1993 and 1992, respectively, and total revenues of $21,422,586 and $7,054,979
for the year ended December 31, 1993 and the period September 1, 1992 through
December 31, 1992. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Axiom Real Estate Management, Inc., is based solely on the report
of the other auditors. The financial statements and schedules of Grubb & Ellis
Company and Subsidiaries for the year ended December 31, 1991 were audited by
other auditors whose report dated March 27, 1992, except as to the information
presented in Schedule VIII, for which the date is December 24, 1992, expressed
an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and related schedules. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the 1993
and 1992 consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Grubb & Ellis
Company and Subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information as of December 31, 1993 and 1992 and for the years then
ended set forth therein.
San Francisco, California ERNST & YOUNG
March 29, 1994
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Grubb & Ellis Company and Subsidiaries
We have audited the accompanying consolidated statements of
operations, stockholders' equity and cash flows of Grubb & Ellis Company and
Subsidiaries for the year ended December 31, 1991. We have audited the
financial statement schedules (Schedules II, VIII, and X) for the year ended
December 31, 1991. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of Grubb & Ellis Company and Subsidiaries for the year
ended December 31, 1991, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND
San Francisco, California
March 27, 1992, except as
to the information presented
in Schedule VIII, for which
the date is December 24, 1992
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Axiom Real Estate Management, Inc.:
We have audited the accompanying balance sheets of Axiom Real
Estate Management, Inc. as of December 31, 1993 and 1992 and the related
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1993 and for the period September 1, 1992 (date of
inception) through December 31, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Axiom Real Estate
Management, Inc. as of December 31, 1993 and 1992, and the results of its
operations and its cash flows for the year ended December 31, 1993 and for the
period September 1, 1992 (date of inception) through December 31, 1992 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Pittsburgh Pennsylvania
January 28, 1994
24
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
ASSETS
1993 1992
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $22,364 $12,937
Receivables:
Real estate brokerage
commissions 493 4,406
Real estate services fees and other
commissions receivable 2,312 3,047
Other receivables 4,865 3,420
Real estate investments and other
assets held for sale -- 1,951
Prepaids and other current assets 2,628 726
------- -------
Total current assets 32,662 26,487
Noncurrent assets
Real estate brokerage commissions
receivable 1,155 1,214
Real estate investments held for sale and real estate owned 1,305 1,608
Equipment and leasehold improvements, net 5,063 3,974
Excess of cost over net assets of acquired
companies, net of accumulated amortization of
$15,555 at December 31, 1992 -- 10,458
Other assets 2,000 931
------- -------
Total assets $42,185 $44,672
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
25
<PAGE>
GRUBB AND ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(in thousands except per share amounts and shares)
<TABLE>
<CAPTION>
LIABILITIES
1993 1992
---- ----
<S> <C> <C>
Current liabilities
Notes payable and current portion of long-term debt $ 506 $ 2,277
Current portion of notes payable and long-term debt to
related party 8,830 18,830
Accounts payable 1,873 3,028
Compensation and employee benefits 11,817 8,628
Deferred commissions payable 2,814 1,914
Accrued severance obligations 2,883 1,424
Accrued office closure costs 3,043 3,036
Accrued claims and settlements 10,375 14,432
Other accrued expenses 8,363 6,191
--------- ---------
Total current liabilities 50,504 59,760
Long-term liabilities
Long-term debt, net of current portion 900 737
Long-term debt to related party , net of
current portion 15,237 20,507
Accrued claims and settlements 9,678 9,396
Accrued severance obligations 555 1,215
Accrued office closure costs 4,043 4,308
Other 235 207
--------- ---------
Total liabilities 81,152 96,130
--------- ---------
REDEEMABLE PREFERRED STOCK
12% Senior convertible preferred stock, $100.00 per share
Redemption Value:
137,160 shares outstanding 14,365 --
5% Junior convertible preferred stock, $100.00 per share
Redemption Value:
150,000 shares outstanding 15,535 --
--------- ---------
Total redeemable preferred stock 29,900 --
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value: 1,000,000
shares authorized; 287,160 shares issued as redeemable
preferred stock.
Common stock, $.01 par value:
25,000,000 shares authorized; 4,060,271
and 3,601,496 shares issued and outstanding at
December 31, 1993 and 1992, respectively, giving
retroactive effect to the one-for-five reverse
stock split and reduction in par value. 41 36
Additional paid-in-capital 48,070 47,276
Retained earnings (deficit) (116,978) (98,770)
--------- ---------
26
<PAGE>
Total stockholders' equity (deficit) (68,867) (51,458)
--------- ---------
Total liabilities and stockholders' deficit $ 42,185 $ 44,672
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
27
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1993, 1992 and 1991
(in thousands except per share amounts and shares)
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Revenue
Commercial real estate brokerage
commissions $ 141,875 $ 136,082 $ 139,513
Residential real estate brokerage
commissions 20,266 49,171 88,572
Real estate services fees,
commissions and other 38,590 37,709 38,149
Interest income 442 529 1,656
Other 551 672 744
---------- ---------- ----------
Total revenue 201,724 224,163 268,634
---------- ---------- ----------
Cost and expenses
Real estate brokerage and other
commissions 100,250 117,154 138,459
Selling, general and administrative 55,958 64,607 72,022
Salaries and wages 44,780 48,412 58,477
Interest expense 333 155 553
Interest expense to related party 2,255 4,225 4,173
Depreciation and amortization 2,287 3,802 6,820
Special charges and unusual items 13,494 44,879 36,982
---------- ---------- ----------
Total costs and expenses 219,357 283,234 317,486
---------- ---------- ----------
Loss before income taxes (17,633) (59,071) (48,852)
Provision for income taxes (575) (605) (445)
---------- ---------- ----------
Net loss (18,208) (59,676) (49,297)
---------- ---------- ----------
---------- ---------- ----------
Undeclared dividends (accretion of
liquidation preference) on
preferred stock $ (2,196) -- --
Net loss applicable to
common stockholders $ (20,404) $ (59,676) $ (49,297)
Net loss per common share and
equivalents, giving retroactive
effect to the one-for-five reverse
stock split on January 29, 1993 $ (5.08) $ (17.01) $ (14.77)
Weighted average common shares
giving retroactive effect to the
one-for-five reverse split on
January 29, 1993. 4,019,795 3,509,303 3,336,572
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
28
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1993, 1992 and 1991
(in thousands except per share amounts and shares)
<TABLE>
<CAPTION>
Total
Common Stock Common
------------ Additional Retained Stockholders'
Outstanding Paid-in- Earnings Equity
Shares Amount Capital (Deficit) (Deficit)
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
December 31, 1990 16,564,858 $ 16,565 $ 28,763 $ 10,203 $ 55,531
Common stock issued for:
Employee common stock
purchase agreements and
exercises of common stock
options, net of common
stock tendered 88,288 88 18 106
Acquisition earnouts 104,870 105 21 126
Net loss (49,297) (49,297)
----------- -------- -------- --------- ----------
December 31, 1991 16,758,016 16,758 28,802 (39,094) 6,466
Common stock issued for:
Defined contribution plan 211,753 212 79 291
Compensation in lieu of cash 905,749 905 405 1,310
Employee common stock
purchase agreements and
exercises of common stock
options, net of common
stock tendered 94,165 94 6 100
Acquisition earnouts 37,798 38 13 51
Net loss (59,676) (59,676)
----------- -------- -------- --------- ----------
December 31, 1992 18,007,481 18,007 29,305 (98,770) (51,458)
Effect of one-for-five reverse
stock split and change in par
value from $1.00 to $0.01
per share. (14,405,985) (17,971) 17,971
Undeclared dividends (accretion
of liquidation preference)
on preferred stock (2,196) (2,196)
Common stock issued for:
Exercise of Old Prudential
warrant 397,549 4 2,898 2,902
Rights redemption 42,400 1 1
Employee common stock
purchase agreements and
exercises of common stock
options, net of common
stock tendered 14,161 70 70
Acquisition earnouts 4,665 22 22
Net loss (18,208) (18,208)
----------- -------- -------- --------- ----------
December 31, 1993 4,060,271 $ 41 $ 48,070 $(116,978) $ (68,867)
----------- -------- -------- --------- ----------
----------- -------- -------- --------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
29
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1993, 1992, and 1991
(in thousands)
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(18,208) $(59,676) $(49,297)
Adjustments to reconcile net loss to net cash used by
operating activities:
Gain (loss) on sale of real estate and other assets 20 (556) (1,497)
Loss from equity investments -- 190 572
Depreciation and amortization 2,287 3,802 6,820
Change in asset valuation allowances 25 1,981 (1,121)
Other non-cash charges related to special charges
and unusual items 13,494 44,879 36,618
Change in Operating Assets and Liabilities:
Decrease in real estate brokerage commissions receivable 3,937 2,748 2,904
Decrease (increase) in other asset accounts (2,446) 3,070 1,342
Increase (decrease) in accounts payable (1,153) 1,704 385
Increase (decrease) in deferred commissions payable 900 (857) 62
Decrease in other liability accounts (1,589) (62) (4,625)
------- -------- --------
Net cash used in operating activities (2,733) (2,777) (7,837)
------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sale of assets 3,350 3,747 4,659
Purchases of equipment and leasehold improvements (3,115) (1,577) (1,046)
Proceeds from disposition of real estate joint ventures
and real estate owned 389 526 1,319
Distribution from (advances to) real estate joint ventures 76 (152) (1,529)
Cash payments for acquisition earnout agreements -- (51) (210)
------- -------- --------
Net cash provided by investing activities 700 2,493 3,193
------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of preferred stock 13,750 -- --
Offering costs related to issuance of preferred stock (1,281) -- --
Proceeds from borrowing 8,000 700 5,000
Repayment of notes payable (9,067) (1,690) (1,194)
Proceeds from issuance of common stock 58 104 106
------- -------- --------
Net cash provided by (used in) financing activities 11,460 (886) 3,912
Net increase (decrease) in cash and cash equivalents 9,427 (1,170) (732)
Cash and equivalents at beginning of the year 12,937 14,107 14,839
------- -------- --------
Cash and cash equivalents at end of the year $ 22,364 $ 12,937 $ 14,107
------- -------- --------
------- -------- --------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
30
<PAGE>
31
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. COMPANY OPERATIONS AND LIQUIDITY
BUSINESS:
The Company's predominant business activity is providing real estate
services, comprised of commercial brokerage, residential brokerage,
property management (primarily through its majority owned subsidiary Axiom
Real Estate Management, Inc. ("Axiom")) and other services offered
primarily to real estate owners, investors and tenants.
LIQUIDITY AND SUBSEQUENT EVENTS:
Liquidity and stockholders' equity have been adversely affected during the
last four years by significant losses from operations resulting from
adverse economic conditions in the real estate industry. These accumulated
losses have resulted in a deficit in stockholders' equity and a negative
current ratio.
The Company has taken the following significant steps toward meeting its
1994 operating plan with the objective of returning to profitability and
improving liquidity:
During March 1994, the Company obtained an interim financing
commitment from Warburg, Pincus Investors, L.P., a Delaware limited
partnership ("Warburg"). This commitment provides for a loan of up to
$10 million at an initial interest rate of 5% per annum, and would
mature 13 months from issuance. The loan will be secured by the
Company's commercial brokerage revenues.
Subject to stockholder approval and certain other conditions, the
Company would obtain equity financing through a sale of rights (the
"Rights Offering"). The Rights Offering would entitle each
stockholder to acquire one right for each share of stock owned. Under
certain conditions, stockholders would have certain rights to
oversubscribe to the extent that other stockholders do not subscribe.
Warburg would acquire any common stock not acquired by the public
stockholders through the exercise of rights, up to an amount not
exceeding $10 million plus accrued interest on the Warburg loan. The
rights, which are planned to be non-transferable, would be offered to
common stockholders of the Company at a price tentatively set at
$2.375 per share. The interest rate on the Warburg interim financing
will increase to 10% per annum in the event that stockholder approval
of the Rights Offering is not obtained.
32
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
LIQUIDITY AND SUBSEQUENT EVENTS, CONTINUED:
The Company's debt to The Prudential Insurance Company of America
("Prudential") was restructured. The debt payment schedule was
amended such that the Company will not be required to make principal
payments on any of the Prudential debt prior to November 1, 1997.
Additionally, the New Revolving Credit Note, as amended, will be due
November 1, 1999, with a waiver of the requirement that the Company
pay this note in full during one consecutive sixty-day period in 1994
(see Note 5).
In consideration for these agreements, Warburg and Prudential would
receive approximately 325,000 warrants and 150,000 warrants,
respectively, to purchase common stock of the Company. The exercise
price of these warrants would be equal to the rights offering price.
Certain covenants related to the Prudential debt will remain in place,
but will not be in effect during a designated three-year period (see
Note 5).
The Company has established a restructuring plan that provides for
closure of certain unprofitable operations and which is expected to
centralize management and reduce overhead expense. As part of the
implementation of this plan, during February 1994, the Company closed
four of its unprofitable appraisal and consulting offices.
Additionally, during March 1994, the Company reorganized its
operations into three regions from four regions.
As part of its strategic planning, the Company has developed an operating
plan, which includes the above activities, and which projects cash flow for
the year adequate to meet obligations as they become due. It is
management's belief that the operating plan is achievable, although in the
event that the 1994 operating plan is not substantially achieved because of
deteriorating economic conditions or other unfavorable events, the Company
may further reduce expense levels, or undertake other actions as may be
appropriate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned subsidiaries and controlled
partnerships (the "Company"). All significant intercompany accounts and
transactions and transactions with unconsolidated joint ventures and
partnerships accounted for under the equity method of accounting are
eliminated.
BASIS OF REVENUE RECOGNITION:
Real estate sales commissions are generally recognized at the earlier of
receipt of payment, close of escrow or transfer of title between buyer and
seller. Receipt of payment occurs at the point at which all Company
services have been performed, title to real property has passed from seller
33
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
BASIS OF REVENUE RECOGNITION, CONTINUED:
to buyer, if applicable, and no contingencies exist with respect to
entitlement to the payment. Real estate leasing commissions are generally
recognized at the earlier of receipt of payment or occupancy, assuming the
Company has possession of a signed lease agreement and all significant
contingencies have been removed. All other commissions and fees are
recognized at the time the related services have been performed by the
Company, unless significant future contingencies exist.
COSTS AND EXPENSES:
Real estate brokerage commission and other commission expense
(salespersons' participation) is recognized concurrently with the recording
of the related revenue. All other costs and expenses are recognized when
incurred.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are carried at cost. Depreciation of
equipment is computed by the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements are
amortized by the straight-line method over their useful lives not to exceed
the terms of the leases. Maintenance and repairs are charged to expense as
incurred.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES:
The excess of cost over net assets of acquired companies ("goodwill"),
which includes additional consideration paid to the sellers in the form of
contingent earnout agreements, has been amortized using the straight-line
method over periods ranging from 10 to 40 years.
The Company evaluates the carrying value of its goodwill and other assets
on an ongoing basis by reviewing a number of factors, including operating
results, business plans, budgets and economic projections. The Company's
evaluation previously focused upon revenues, direct costs and operating
results of the residential and commercial units before allocation of
corporate overhead. These evaluations resulted in write-downs for
permanent impairment in value of approximately $18.9 million in 1992 and
$29.5 million in 1991. Of these amounts, in 1992 $10.6 million related to
commercial brokerage operations, $1.3 million related to residential
brokerage operations and $7.0 related to other operations, and in 1991,
$24.8 million related to commercial brokerage operations, $3.8 million
related to residential operations, and $900,000 related to other
operations. As of January 1, 1993, all of the remaining unamortized
goodwill ($10.5 million) was associated with the commercial brokerage
operation. Due to downsizing of operations and changes in its business
plan, the Company analyzed the recoverability of the remaining goodwill
based upon projected operations of the remaining business after considering
all corporate overhead. As more fully discussed in Note 10 regarding
special charges and unusual items, 1993 events and the Company's business
plan for 1994 indicated that the business unit as structured in 1993 was,
and would continue to be, unprofitable and therefore unable to generate
income sufficient to recover goodwill without a restructuring. As
34
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES, CONTINUED:
a result, the Company wrote off its remaining goodwill balance related to
this unit in the fourth quarter of 1993.
TAXES ON INCOME:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. SFAS No.
109 supersedes SFAS No. 96, Accounting for Income Taxes, which was adopted
by the Company in January, 1987, and changes the criteria for recognition
and measurement of deferred tax assets. As permitted under the Statement,
the Company has elected not to restate the financial statements of prior
years. The cumulative effect of the change and the effect of the change on
pre-tax income for the year ended December 31, 1993 is not material.
Deferred income taxes, if any, are recorded to reflect the tax consequences
in future years of the differences between the tax bases of assets and
liabilities and their financial reporting amounts. Investment tax credits
are accounted for under the flow-through method, whereby the provision for
income taxes is reduced in the year the tax credits first become available.
EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS:
Earnings (loss) per common share and equivalents computations are based on
the weighted average number of common shares outstanding after giving
effect to potential dilution from common stock options and warrants. The
calculation of loss per common share includes net loss adjusted for amounts
applicable to the Senior and Junior Convertible Preferred Stock for the
undeclared dividends (accretion of liquidation preference) in the amounts
of approximately $1,509,000 and $687,000, respectively, for the year ended
December 31, 1993.
CASH AND CASH EQUIVALENTS:
The Company had $1,275,260 of cash that is subject to withdrawal
restrictions at December 31, 1993, and none was restricted at December 31,
1992. These balances are associated with the Company's error and omissions
insurance captive and are restricted to use for errors and omissions
insurance claims.
For purposes of the Statement of Cash Flows, cash equivalents include
investments in highly liquid debt instruments which are purchased with a
maturity of ninety days or less. Cash payments for interest for the three
years ended December 31, 1993, 1992 and 1991 were approximately $1.0
million, $2.7 million and $4.7 million, respectively. Cash payments for
income taxes for the three years ended December 31, 1993, 1992 and 1991
were approximately $515,000, $949,000 and $1,146,000, respectively.
REAL ESTATE INVESTMENTS:
Real estate investments which are held for sale are recorded at the lower
of cost or net realizable value. Carrying amounts reflect periodic
depreciation. The Company has recorded a valuation allowance on real
35
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
REAL ESTATE INVESTMENTS, CONTINUED:
estate investments and real estate owned of approximately $3,792,000 and
$6,366,000 at December 31, 1993 and 1992, respectively.
In connection with the disposition of real estate investments, the Company
sold a property with a book value of approximately $413,000 in exchange for
a note receivable. The Company received a note receivable of $1.2 million
and recorded $778,000 of deferred revenue related to this transaction. The
Company sold another property for approximately $1.1 million, the proceeds
from which were used to extinguish the debt on the property. Additionally,
a property with a basis of approximately $411,000 was acquired in
connection with the sale of the Company's real estate advisory operations,
in exchange for a note payable of approximately $381,000.
Included in accrued claims and settlements is an estimated amount
representing the Company's interest in operating losses of a prior joint
venture investment in real estate for which the Company could be liable.
RECLASSIFICATIONS:
Certain reclassifications of the 1992 and 1991 consolidated financial
statements have been made to conform to the 1993 presentation.
3. REAL ESTATE BROKERAGE COMMISSIONS RECEIVABLE
Real estate brokerage commissions receivable were as follows at December
31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
---- ----
(in thousands)
<S> <C> <C>
Commissions receivable $ 16,625 $ 22,082
Salespersons' participation (9,950) (11,460)
Allowance for uncollectible accounts (5,027) (5,002)
-------- --------
Total 1,648 5,620
Less portion classified as current 493 4,406
-------- --------
Noncurrent portion $ 1,155 $ 1,214
-------- --------
-------- --------
</TABLE>
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at December
31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
---- ----
(in thousands)
<S> <C> <C>
Office furniture and equipment $12,701 $11,448
Leasehold improvements 5,055 6,672
------- -------
Total 17,756 18,120
Less accumulated depreciation and amortization 12,693 14,146
------- -------
Equipment and leasehold improvements, net $ 5,063 $ 3,974
------- -------
------- -------
</TABLE>
36
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
5. LONG-TERM DEBT AND RECAPITALIZATION
Long-term debt consisted of the following at December 31, 1993 and 1992,
before the restructuring of debt which occurred in March 1994:
<TABLE>
<CAPTION>
1993 1992
---- ----
(in thousands)
<S> <C> <C>
New Senior Notes, 9.9%, due
November 1, 1996 $ 10,000 - -
Senior Notes, 9.9%, due November 1, 1996 - - $ 10,000
$10 million 10.65% PIK Notes, net of
$920,000 cancellation pursuant
to terms of debt restructuring
and $493,000 of unamortized discount, due
November 1, 1999 9,067 - -
$25 million Subordinated Notes,
10.65%, net of unamortized
discount of $664,000 at December 31, 1992 - - 24,336
New Revolving Credit Note at 2.5%
above LIBOR, due December 31, 1994
(exchangeable for a 2-year term loan
due December 31, 1996) 5,000 - -
1991 Revolving Line of Credit, at 3.5%
above LIBOR, due February 15, 1993 - - 5,000
Notes payable at various rates of interest,
due through 2005 1,406 3,015
-------- --------
25,473 42,351
Less portion classified as current 9,336 21,107
-------- --------
Long-term portion $ 16,137 $ 21,244
-------- --------
-------- --------
</TABLE>
Annual maturities of the outstanding principal of long-term debt were as follows
at December 31, 1993: 1994, $9,336,000; 1995, $3,386,000; 1996, $2,870,000;
1997, $3,212,000; 1998, $3,214,000 and thereafter, $3,455,000.
SENIOR AND SUBORDINATED NOTES:
During 1986, the Senior and Subordinated Notes were issued to Prudential. In
connection with the issuance of the Subordinated Notes, the Company also issued
a detachable stock subscription warrant ("Old Prudential Warrant") to
37
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
SENIOR AND SUBORDINATED NOTES, CONTINUED:
purchase shares of the Company's common stock, the number of shares and exercise
price of which were subject to certain anti-dilution provisions.
The Subordinated Notes were discounted to yield an effective annual rate of 12%.
The resultant discount, net of issuance costs, was allocated to the warrant and
included in additional paid-in-capital.
At December 31, 1991, the Old Prudential Warrant provided for the purchase of
1,987,748 shares of the Company's common stock at an exercise price of $2.47 per
share. In connection with a modification of the debt agreements, as of January
1, 1992, the price was adjusted to $1.46 per share and the term of the warrant
was extended from November 1994 to November 1996. Giving effect to the one-for-
five reverse stock split, the Old Prudential Warrant provided for the purchase
of 397,549 shares at a price of $7.30 per share. The Old Prudential Warrant was
exercised in connection with the debt restructuring in January 1993.
REVOLVING LINE OF CREDIT:
On February 8, 1991, the Company entered into an agreement under which
Prudential provided a revolving line of credit of up to $5 million for two years
(the "1991 Revolving Line of Credit"), which was fully utilized by the Company.
OTHER NOTES PAYABLE:
Other notes payable of the Company are secured by various assets with a carrying
value of approximately $6.2 million and $5.9 million at December 31, 1993 and
1992, respectively.
1992 MODIFICATIONS OF DEBT AGREEMENTS:
On March 25, 1992 the Senior and Subordinated Notes and the 1991 Revolving Line
of Credit were amended effective January 1, 1992. The amendment modified the
financial covenants and provided for a deferral of the $5 million principal
payment on the Subordinated Notes due November 1, 1992 to February 1, 1993. In
addition, interest payments totaling approximately $1.8 million due on May 1,
1992 on the Senior and Subordinated Notes were deferred until August 1, 1992.
In November 1992, the Company and Prudential signed a Senior Note, Subordinated
Note and Revolving Credit Note Agreement (the "New Note Agreement") to
restructure the Senior and Subordinated Notes and Revolving Line of Credit
discussed above. Additionally, on January 29, 1993, the Company issued 150,000
shares of 5% Junior Convertible Preferred Stock and five-year warrants to
purchase 1 million shares of common stock at an exercise price of $1.10 per
share (200,000 shares at $5.50 per share after the January 29, 1993 one-for-five
reverse stock split) in exchange for $15 million of the original Prudential
Subordinated Notes. Holders of Junior Convertible Preferred Stock will be
entitled to receive, out of any funds legally
38
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
1992 MODIFICATIONS OF DEBT AGREEMENTS, CONTINUED:
available, cumulative dividends payable in cash at a rate of 5% per annum
compounded annually.
Pursuant to the New Note Agreement, all of the outstanding Senior Notes were
converted into $10 million of the Company's 9.9% Senior Notes Due November 1,
1996 (the "New Senior Notes"). The New Senior Notes defer the 1993 principal
payment until 1995 and 1996. Further, $10 million of the Subordinated Notes
were converted into $10 million of 10.65% Payment-in-Kind Notes Due November 1,
1999 (the "10.65% PIK Notes"). Also pursuant to the New Note Agreement,
Prudential exercised its warrants to purchase 1,987,748 shares at $1.46 (397,549
shares at an exercise price of $7.30 after the one-for-five reverse stock
split), for which approximately $920,000 of the 10.65% PIK Notes and $1,982,000
of accrued interest on the original Subordinated Notes were canceled by
Prudential in payment of the exercise price of the warrants. Semi-annual
interest payments are required pursuant to both the New Senior Notes and the
10.65% PIK Notes, although until all of the New Senior Notes have been retired,
the interest due under the 10.65% PIK Notes may be paid in kind by the issuance
of additional 10.65% PIK Notes. Annual principal payments are required in the
amount of (i) $2 million on November 1 of each of 1993 and 1994 with respect to
the New Senior Notes, (ii) $3 million on November 1 of each of 1995 and 1996,
also with respect to the New Senior Notes, (iii) one third of the principal
amount of the 10.65% PIK Notes outstanding on November 1 of each of 1997 and
1998, and (iv) all remaining outstanding principal amounts of the 10.65% PIK
Notes on November 1, 1999. The $2 million payment due November 1, 1993 on the
New Senior Note has been deferred until May 1, 1994.
Pursuant to the New Note Agreement, the Company issued to Prudential a $5
million Revolving Credit Note due December 31, 1994 (the "New Revolving Credit
Note"), as a restructuring of the 1991 Revolving Line of Credit, which was to
expire on February 15, 1993. The New Revolving Credit Note bears interest at
2.5% above LIBOR (2% below the rate of interest pursuant to the 1991 Revolving
Line of Credit). During one sixty consecutive day period in 1994, the Company
will be required to pay down in full this note. Upon maturity, the Company will
have the option of converting the New Revolving Credit Note into a new term
note, which would mature on December 31, 1996 (the "Converted Term Note"). The
Converted Term Note would have an interest rate of LIBOR plus 3% and require
semi-annual principal payments (payable on June 30 and December 31 of each of
1995 and 1996) of $1,250,000.
The New Note Agreement contains significant restrictions on the payment of cash
dividends and repurchases of stock of the Company. The New Note Agreement also
contains significant restrictions on the Company's (and certain of its
subsidiaries') ability to, among other things, (i) incur debt and liens upon
their properties, (ii) enter into guarantees and make loans, investments and
advances, (iii) merge or enter into similar business combinations, (iv) conduct
any business other than their present businesses, (v) sell assets, including
receivables, (vi) make capital expenditures and (vii) enter into certain other
transactions.
The New Note Agreement between the Company and Prudential contains various
affirmative and negative covenants, which require, among other things, that the
Company (combined with certain of its subsidiaries and taken as a whole)
39
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
1992 MODIFICATIONS OF DEBT AGREEMENTS, CONTINUED:
maintain a ratio of Consolidated Current Assets to Consolidated Current
Liabilities (as such terms are defined in the New Note Agreement), excluding the
current portion of long-term debt, of greater than 1:1 at the end of each of its
fiscal quarters.
As of December 31, 1993 the Company did not meet certain covenants and
restrictions as established in the New Note Agreement, including the
aforementioned ratio. However, Prudential has provided a waiver of these
covenants as of December 31, 1993 (see Note 1).
The Company issued to Warburg and Joe F. Hanauer ("Hanauer") 137,160 shares of
12% Senior Convertible Preferred Stock, five-year warrants to purchase 500,000
and 200,000 shares of common stock at exercise prices of $5.00 and $5.50 per
share, respectively, and five-year warrants to purchase up to 400,000 shares of
common stock which become exercisable at a formula price only in the event the
Company incurs a defined liability in excess of $1.5 million, all in exchange
for $13,750,000 in cash. These amounts reflect the one-for-five reverse stock
split. Holders of Senior Convertible Preferred Stock will be entitled to
receive, out of any funds legally available, cumulative dividends payable in
cash, at a rate of 12% per annum.
AXIOM NOTE PAYABLE:
The Company's subsidiary, Axiom, has a credit facility with IBM. As of December
31, 1993, the available line of credit was $2,050,000. This credit facility is
collateralized by substantially all of Axiom's assets and contains certain
covenants, including the maintenance of minimum levels of net worth, financial
ratios and restrictions on the payment of dividends.
PREFERRED STOCK:
The 12% Senior Convertible Preferred Stock and 5% Junior Convertible Preferred
Stock are subject to mandatory conversion in the event that (i) at all times
during a two-year period the consolidated debt to net income before taxes,
excluding extraordinary items, and income or loss from discontinued operations
plus total interest expense and depreciation and amortization has not exceeded
3.0:1.0, (ii) on each trading day during a six-month period the price of the
Common Stock has exceeded $8.75 per share and (iii) the Company is in full
compliance with the terms and conditions of all agreements pursuant to which the
Company has incurred indebtedness for borrowed money.
The Company must redeem the Senior and Junior Convertible Preferred Stock
beginning November 1, 2000 and ending no later than November 1, 2003.
Each share of Senior Convertible Preferred Stock and Junior Convertible
Preferred Stock is convertible, at the option of the holder, into shares of
common stock of the Company, which number of common shares is determined by
dividing the Senior Convertible Preferred Stock Stated Value or the Junior
Convertible Preferred Stock Stated Value, as the case may be, by the conversion
prices of $3.01371 and $5.6085, respectively. The stated value of the Senior
Convertible Preferred Stock and Junior Convertible Preferred Stock is an amount
in cash equal to $100.00 per share. Such initial conversion
40
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
PREFERRED STOCK, CONTINUED:
prices are subject to adjustment as provided in the Certificate of Amendment of
Certificate of Incorporation.
Except as otherwise required by law, the Senior Convertible Preferred Stock, the
Junior Convertible Preferred Stock, the common stock and any other capital stock
of the Company entitled to vote with the common stock is deemed to be one class
for the purpose of voting on all matters submitted for the approval of the
stockholders of the Company.
The carrying value of the Senior Convertible Preferred Stock and the Junior
Convertible Preferred Stock is adjusted by undeclared dividends (accretion of
liquidation preference) due upon maturity in the amount of $1,509,000 and
$687,000, respectively, for the year ended December 31,1993, direct costs
associated with the Recapitalization in the amount of $1,095,000 and $187,000,
respectively, for the year ended December 31,1993 and the accretion of direct
costs in the amount of $201,000 and $34,000, respectively, for the year ended
December 31, 1993.
The Senior Convertible Preferred Stock, with respect to dividend rights and
rights on redemptions and on liquidation, winding up and dissolution, ranks
prior to any other equity securities of the Company, including all classes of
common stock and any other series of Preferred Stock of the Company. The Junior
Convertible Preferred Stock, with respect to dividend rights and rights on
redemption and on liquidation, winding up and dissolution, ranks prior to any
other equity securities of the Company, including all classes of common stock
and any other series of Preferred Stock of the Company other than the Senior
Convertible Preferred Stock, which ranks prior to the Junior Convertible
Preferred Stock.
STOCKHOLDER RIGHTS PLAN:
In March 1989, the Company adopted a Stockholder Rights Plan (the "Rights
Plan"), pursuant to which each outstanding share of common stock carried with it
the right ("Right") to purchase from the Company certain junior participating
preferred stock. Upon the closing of the transactions of the Recapitalization,
all Rights existing under the Rights Plan were redeemed for $.01 per share, paid
in shares of common stock.
MARCH 1994 DEBT RESTRUCTURING:
During March 1994, the Company, Warburg and Prudential entered into an agreement
in principle (the "Agreement") pursuant to which the existing Prudential debt
agreements were amended to provide that the Company will not be required to make
principal payments on any of the Prudential debt prior to November 1, 1997.
Thereafter, the revolving credit facility will mature on November 1, 1999,
principal on the Senior Note will be payable in two equal installments on
November 1, 1997 and 1998, and principal on the PIK Notes will be payable in two
approximately equal installments on November 1, 2000 and 2001. The interest
rate on the PIK Notes will increase from 10.65% to 11.65% per annum on January
1, 1996. In addition, certain covenants of the debt agreements remain in place,
but will not be in effect until April 1, 1997. The debt agreements, as amended,
provide for supplemental principal payments commencing July 1, 1998 if the
Company meets certain financial tests.
41
<PAGE>
42
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
MARCH 1994 RESTRUCTURING, CONTINUED:
The Agreement also contemplates certain amendments to the existing Senior
Convertible Preferred Stock held by Warburg and the Junior Convertible Preferred
Stock held by Prudential. Both series of preferred stock would be amended to be
nonredeemable. As of the date of the Rights Offering, the exercise prices on
the outstanding warrants held by Prudential and Warburg would be reduced to
$3.50 per share pursuant to the terms of such warrants, except that the exercise
price on the contingent warrants to purchase 370,566 shares held by Warburg,
which are exercisable only under specified circumstances, would be reduced to
the same price per share as the Rights Offering. As it relates to the Rights
Offering, Warburg will retain certain anti-dilution rights with respect to the
preferred stock and warrants which it currently holds. Thereafter, the
preferred stock and warrants held by Warburg would be amended to eliminate the
anti-dilution provisions with respect to the issuance of common stock and common
stock equivalents at less than the conversion price or exercise price.
The preferred stock and the outstanding warrants held by Prudential would be
amended to eliminate the anti-dilution provisions with respect to the issuance
of common stock and common stock equivalents at less than the conversion price
or exercise price. The Junior Convertible Preferred Stock also would be amended
to increase the dividend rate to 10% per annum effective January 1, 2002, with
further increases of 1% per year effective January 1, 2003 and January 1, 2004
and 2% per year effective January 1, 2005 and each January 1 thereafter. The
Senior Convertible Preferred Stock would be amended to provide that at such time
as the dividend rate on the Junior Convertible Preferred Stock would increase
above 12%, the dividend rate on the Senior Convertible Preferred Stock would
increase by the same amount as the dividend rate on the Junior Convertible
Preferred Stock. The Junior Convertible Preferred Stock also would be amended
to provide that under certain circumstances, following the conversion of the
Senior Convertible Preferred Stockholders of the Junior Convertible Preferred
Stock will be obligated to convert such preferred stock.
43
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
6. INCOME TAXES
The provision for income taxes for each of the three years ended December 31,
1993 consisted of state income taxes due currently.
At December 31, 1993, the following income tax carryforwards were available to
the Company:
<TABLE>
<CAPTION>
Expiration
Amount Dates
-------------- -------------
(in thousands)
<S> <C> <C>
Federal regular tax operating loss
carryforwards $28,600 2001 to 2008
Federal investment tax credit
carryforwards $ 278 1998 to 2000
</TABLE>
As of December 31, 1993, the Company had a federal tax net operating loss
carryforward of $28.6 million and a federal investment tax credit carryforward
of $278,000, after taking into effect the reduction in tax attributes pursuant
to Section 108(b)(2) of the Internal Revenue Code (the "Code"), resulting from
the cancellation of indebtedness pursuant to Section 108(a) of the Code. The
Recapitalization that occurred in January 1993 constituted an ownership change
within the meaning of Section 382 of the Code thereby limiting the amount of
taxable income after the ownership change which may be offset by the above net
operating loss carryovers attributable to periods prior to the ownership change.
The annual amount of net operating losses allowed under such Section 382 will be
approximately $825,000. Net operating losses attributable to periods subsequent
to the ownership change are approximately $10.5 million, and are not subject to
the limitation under Code Section 382.
The Company's effective tax rate on its loss before taxes differs from the
statutory regular tax rate as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate (35.0)% (34.0)% (34.0)%
State income taxes 3.3 1.0 0.9
Goodwill amortization 20.9 11.6 22.4
Losses for which no tax benefit was
recorded in current period 14.1 22.4 11.6
---- ---- ----
Effective income tax rate for the year 3.3% 1.0% 0.9%
---- ---- ----
---- ---- ----
</TABLE>
The differences between the tax bases of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax liabilities or assets are: real estate investment valuation
allowances, equity in partnership gains and losses, property and equipment
depreciation and accrued expenses.
44
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
6. INCOME TAXES, CONTINUED:
At December 31, 1993, net deferred tax assets totaled approximately $24.8
million. The total valuation allowance recognized for the net deferred tax
assets was also approximately $24.8 million. The valuation allowance decreased
by approximately $2.8 million during the year.
The components of the Company's deferred tax (liabilities) and assets are as
follows as of December 31, 1993:
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Gross deferred tax liabilities - current
Commission and fee reserves $ (514)
Gross deferred tax assets - current
Commission and fee reserves 4,263
Litigation accrual 3,631
Compensation accrual 2,540
Gross deferred tax assets - current ------ 10,434
Deferred tax assets valuation
allowance - current (9,920)
Gross deferred tax liabilities - noncurrent
Investment in partnerships $ (231)
Gross deferred tax assets - noncurrent
Depreciation 27
Commission and fee reserves 3,726
Litigation accrual 3,387
Net operating loss carryforwards 10,010
Estimated net operating loss
carryforward limitation under
Code Section 382 (2,010)
Gross deferred tax assets - noncurrent ------ 15,140
Deferred tax assets valuation
allowance - noncurrent (14,909)
-------
Net deferred tax (liability) asset $ 0
-------
-------
</TABLE>
45
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
7. STOCK PLANS
The information set forth below regarding stock option compensation plans
gives effect to the one-for-five reverse stock split in 1993. Changes in
stock options were as follows for the years ended December 31, 1993 and
1992:
<TABLE>
<CAPTION>
1993 1992 1991
--------------------------- --------------------------- ---------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Stock options
outstanding
at the
beginning of $5.00 to $5.00 to $11.25 to
the year 199,762 51.88 209,159 51.88 193,248 51.88
Granted or 2.88 to $5.00 to $5.00 to
regranted 662,000 4.38 52,399 10.00 67,800 10.00
Lapsed or 5.00 to 5.00 to 6.88 to
canceled (129,395) 51.88 (61,796) 20.00 (51,889) 22.50
Exercised (4,666) 6.88 - - - - - - - -
------- -------------- ------- -------------- ------- --------------
Stock options
outstanding
at the end of $2.88 to $5.00 to $5.00 to
the year 727,701 28.75 199,762 51.88 209,159 51.88
------- -------------- ------- -------------- ------- --------------
------- -------------- ------- -------------- ------- --------------
Exercisable at
end of the $6.25 to $11.25 to $11.25 to
year 51,680 28.75 107,879 51.88 130,012 51.88
------- -------------- ------- -------------- ------- --------------
------- -------------- ------- -------------- ------- --------------
</TABLE>
STOCK OPTION PLANS:
The Company's 1990 Amended and Restated Stock Option Plan provides for
grants of options to purchase the Company's common stock. The plan was
amended effective May 1993 to authorize a fixed number of 1,350,000 shares
for the plan. At December 31, 1993 and 1992, 627,633 and 70,282 shares
were available for the grant of options, respectively. Stock options under
this plan are granted at prices from 50% up to 100% of the market price per
share at the dates of grant, the terms and vesting schedules of which are
determined by the Compensation Committee of the Board of Directors.
The Company's 1993 Stock Option Plan for Outside Directors provides for
automatic grants to newly-elected non-management directors of options to
purchase 10,000 shares of common stock, at exercise prices set at the
market price at the date of grant. 50,000 shares are authorized for the
plan. The options expire five years from the date of grant and vest over
46
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
STOCK OPTION PLANS, CONTINUED:
three years from such date. At December 31, 1993, an option to purchase
10,000 shares were outstanding under the plan, which was not vested.
During 1991, no options were exercised.
EMPLOYEE COMMON STOCK PURCHASE PLAN:
In 1987, the Company adopted an employee stock purchase plan which enables
eligible employees to purchase common stock of the Company at discounted
prices. In August 1993, the plan was amended to authorize up to 200,000
shares of stock for issuance under this plan. As of December 31, 1993,
100,000 shares were available for issue. During 1993, 1992 and 1991,
6,342, 19,240 and 19,326 shares, respectively, were purchased under this
plan.
401(K) PLANS:
The Company has a defined contribution plan covering eligible employees
other than employees of Axiom. The Company discretionarily contributes to
the plan based upon specified percentages of voluntary employee
contributions, which contributions may be made in common stock or cash, or
a combination of each. Axiom has a 401(k) plan that does not provide for
employer contributions to be made in stock. Expenses for the plans
amounted to approximately $418,000, $32,000, and $353,000 for 1993, 1992,
and 1991, respectively.
8. RELATED PARTY TRANSACTIONS
The Company participates in joint ventures, partnerships and trusts in
which officers, directors and salespersons of the Company may also
participate as investors. Such persons or their affiliates frequently
provide property management and other real estate services to these
entities, and such persons may manage or otherwise control such joint
ventures or partnerships.
Revenue earned by the Company for services rendered to affiliates,
including joint ventures, officers and directors and their affiliates
("Related Parties"), was as follows for the years ended December 31, 1993,
1992, and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Real estate brokerage
commissions $ 618 $ 404 $ 3,334
Real estate services
fees and commissions 1,214 1,235 2,560
</TABLE>
47
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
8. RELATED PARTY TRANSACTIONS, CONTINUED:
The Company rents office space from Related Parties. Such rent expense for
the years ended December 31, 1993, 1992 and 1991 was $1,312,000,
$1,502,000, and 2,628,000, respectively.
At December 31, 1993 and 1992, the Company had $494,000 and $865,000,
respectively, of notes and other receivables from Related Parties, which
are fully reserved.
At December 31, 1993 the Company had a liability of $530,000 due to a
Related Party related to a reimbursement of out-of-pocket costs and
expenses incurred in connection with the Recapitalization.
A limited partnership which is affiliated with the Company is a partner in
a joint venture formed to develop an office building in Southern
California. As permanent financing for the project, the joint venture
borrowed $5.8 million on a non-recourse basis from a Related Party in
September 1990, secured by an unamortized first mortgage on the property at
a rate of 10.02% per year and a term of five years. As of December 31,
1993, the outstanding principal amount on the note was $5.8 million.
At December 31, 1993 and 1992, the Company paid approximately $50,000 and
$190,000, respectively, to a Related Party for administration of the
Company's employee health plan for four of its offices.
In connection with the Recapitalization, certain Related Parties, including
persons or entities which became Related Parties as a result of the
transaction, received reimbursement of expenses totaling approximately
$253,000, and one Related Party received a fee of $325,000.
9. COMMITMENTS AND CONTINGENCIES
The Company was contingently liable for approximately $512,000 at December
31, 1993 as a guarantor of certain obligations of unrelated third parties.
The guarantees arose in connection with the transfer of assets and
liabilities to such parties. These notes payable mature at various dates
through 1998. Of the Company's contingent liability at December 31, 1993,
substantially all is collateralized by land and improved property of these
entities. In the opinion of management, the current underlying value of
the assets collateralizing the contingent liabilities is greater than the
related obligations guaranteed by the Company. The Company has also
indemnified two wholly owned partnerships for their contingent liabilities
of up to $2 million each.
The Company has noncancelable operating lease obligations for office space
and certain equipment ranging from one to eight years, as well as sublease
48
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
9. COMMITMENTS AND CONTINGENCIES, CONTINUED:
agreements. The leases provide for increases that compound annually based
on the Consumer Price Index or otherwise increase at specific rates and
times. Substantially all leases require payment of property taxes,
insurance and maintenance costs in addition to rental payments. The
minimum lease payments are as follows at December 31, 1993:
<TABLE>
<CAPTION>
Gross Sublease
Lease Rental Net Lease
Year Obligation Income Obligation
---- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C>
1994 $14,793 $1,199 $13,594
1995 11,558 978 10,580
1996 8,233 738 7,495
1997 4,090 127 3,963
1998 2,892 127 2,765
Thereafter 3,195 318 2,877
</TABLE>
As a component of the Company's restructuring charges related to the
downsizing and closing of certain offices, the Company has accrued for
approximately $7.1 million of the above expected future minimum rental
payments for offices which have been or are planned to be closed during
1994, net of expected sublease income of approximately $2.7 million, as of
December 31, 1993.
Lease and rental expense for the years ended December 31, 1993, 1992 and
1991 was $19,552,000, $27,510,000, and $30,841,000 , respectively, net of
sublease income of $1,214,000, $1,138,000, and $814,000, respectively.
The Company and certain of its affiliates are defendants in a series of
lawsuits arising from the formation of a limited partnership to purchase an
office/retail building in San Francisco in 1985 in which they acted as the
syndicator, the general partner of the partnership and the property manager
of the investment property. These lawsuits are described below.
MICHAEL R. SPARER, ET AL. V. 222 SUTTER STREET PARTNERS, LTD., ET AL., San
Francisco Superior Court, was filed on March 16, 1989 by nine limited
partners who contended that the Company's affiliates made
misrepresentations in certain partnership offering documents, were
negligent in their investigation of an investment and mismanaged a
property. Pursuant to an agreement among the parties, the plaintiffs'
claims were submitted to arbitration, resulting in an award to the
plaintiffs. The insurance company paid a substantial portion of this award
in 1993. The portion paid by the Company did not have a material effect on
the Company's results of operations.
DONALD C. ANDERSON, ET AL. V. GRUBB & ELLIS COMPANY, ET AL., San Francisco
Superior Court, filed on May 24, 1990, and GABRIEL L. AGUILAR, ET AL. V.
GRUBB & ELLIS COMPANY, ET AL., San Francisco Superior Court, filed on May
31, 1990, are purported class actions on behalf of approximately 180
limited partners other than the SPARER plaintiffs and current Company
employees or affiliates, who invested $14.5 million in the partnership.
The two lawsuits have been consolidated into one action. The allegations
49
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
9. COMMITMENTS AND CONTINGENCIES, CONTINUED:
include claims similar to those in the SPARER case and additional
allegations that the defendants improperly extended the termination date of
the offering. The plaintiffs sought rescission of their interests at the
time of purchase. In March 1994, the Company agreed to settle both
lawsuits subject to court approval and certain other conditions. The court
preliminarily approved the settlement and notices of the settlement have
been sent to the limited partners. A hearing will be held for the court to
consider final approval of the proposed settlement, which includes the
issuance of 50,000 shares of common stock of the Company and the payment of
cash. The Company's insurance carrier will pay a substantial portion of
any cash settlement in these cases.
In March 1994, the Company reached a tentative agreement in principle to
settle a potential claim by a former joint venture partner, relating to a
partnership involving the ownership and operation of commercial real
estate. A number of issues remain outstanding to be negotiated between the
parties. It is expected that these issues can be resolved but there can be
no assurances in this regard. If a settlement is finalized, the Company
expects to pay cash and issue shares of common stock of the Company in
settlement of this claim (see Note 2 "Real Estate Investments"). The
Company has accrued for the estimated settlement costs of this case, of
which such amount is included in special charges and unusual items.
The Company is involved in various other claims and lawsuits arising in the
ordinary course of business, as well as in connection with its
participation in various joint ventures, partnerships and a trust.
In the opinion of management, upon the advice of counsel, the eventual
outcome of the above claims and lawsuits will not have a material adverse
effect on the Company's financial position.
The Company's errors and omissions insurance carrier issued a notice of
non-renewal of this coverage, effective June 1994. The Company is actively
pursuing this coverage with other underwriters and does not anticipate
difficulty in obtaining coverage with another carrier.
50
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
10. SPECIAL CHARGES AND UNUSUAL ITEMS
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(in millions)
<S> <C> <C> <C>
Goodwill write-down $10.1 $18.9 $29.5
Severance and office closure
costs 2.9 6.1 4.4
Reduction in carrying value of
equity in joint venture and other
property investments - - 2.8 2.8
Legal expense and estimated
settlement provisions - - 16.2 - -
Other 0.5 0.9 0.3
---- ---- ----
$13.5 $44.9 $37.0
---- ---- ----
---- ---- ----
</TABLE>
As discussed in Note 2, the Company evaluates the carrying value of its
goodwill and other assets by reviewing a number of factors, including
operating results, business plans, budgets and economic projections, to
determine whether such goodwill is recoverable from future operations. The
Company's evaluation for 1991, 1992 and 1993 was significantly impacted by
a continuation of the recessionary cycle and the severe downturn in the
real estate markets. Goodwill associated with certain acquisitions was
written off in 1991 and 1992 because the Company's analysis of the future
activity of those operations indicated permanent impairment; these entities
were acquired during a period of rapid expansion during the 1980's when
real estate activity was at increased levels and profit margins were
substantially higher than those found in the market today. As of December
31, 1992, all of the remaining unamortized goodwill was associated with the
commercial brokerage operation.
In early 1993, the Company completed a Recapitalization and retained a new
executive management team. New management reevaluated the Company's
business strategy and determined that a variety of restructuring and
recapitalization efforts were necessary in order for the business to
continue as a going concern. These restructuring efforts have included
downsizing operations and refocusing the Company's activities on its core
business functions as well as realigning the operational structure into a
more centralized operation with less middle management. Recapitalization
efforts have included the restructuring of the Company's debt and the
infusion of cash by Warburg and Hanauer (see Note 5). The Company's
analysis of goodwill performed in the fourth quarter of 1993 indicated that
the commercial brokerage business would operate at a loss without the
planned restructuring and recapitalization efforts and would, therefore, be
unable to recover goodwill; accordingly, the remaining goodwill was written
off as of December 31, 1993.
51
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
10. SPECIAL CHARGES AND UNUSUAL ITEMS, CONTINUED:
During each of the last three years, the Company determined that it would
close certain offices and terminate certain employees. The net costs of
such actions were accrued as severance and office closure costs when such
plans were adopted and amounted to approximately $3.9 million, $1.3 million
and $3.6 million for 1993, 1992 and 1991, respectively. Approximately
$443,000, $55,000 and $518,000 of these costs represent non-cash write-
downs and write-offs of equipment and leasehold improvements and other
asset and liability balances for the years 1993, 1992 and 1991,
respectively, with the remaining costs expected to be paid in cash.
As a consequence of the recessionary cycle and depressed real estate
markets, the Company made provisions to increase its valuation allowance of
its partnership and joint venture investments during 1992 and 1991 to
reflect reductions in estimated net realizable values. Estimated net
realizable value is current market value less disposition costs.
The substantial legal expense and estimated settlement provision for 1992
reflects several significant lawsuits including those discussed in Note 9.
Additionally, the Company has evaluated potential professional liability
exposure arising from the Company's salesforce, and this provision includes
an estimate for incurred but not reported cases.
The gains from the sales of the Company's real estate advisory business and
Northern California residential real estate operations during the first
quarter of 1993 which are included in "other" in special charges and
unusual items.
All of the $13.5 million of special charges and unusual items were provided
for in the fourth quarter of 1993. Such amounts are generally attributable
to events which occurred subsequent to the third quarter, such as the
reevaluation of the carrying value of goodwill and other assets due to the
revised business strategy and market emphasis, and events and the
recognition of additional costs for restructuring that became evident in
the fourth quarter when the related plans were developed and adopted.
11. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and interest-bearing investments.
Users of real estate services account for a substantial portion of trade
receivables; collateral is generally not required. The risk associated
with this concentration is limited due to the large number of users and
their geographic dispersion.
The Company places substantially all its interest-bearing investments with
major financial institutions and limits the amount of credit exposure to
any one financial institution in accordance with policy and pursuant to
restrictions in the New Note Agreement with Prudential.
52
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1993
----
First Second Third Fourth
Quarter Quarter Quarter Quarter (A)
------- ------- ------- -----------
(in thousands except per share amounts and shares)
<S> <C> <C> <C> <C>
Revenue $ 42,297 $ 50,732 $ 50,852 $ 57,843
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
Income(loss) before income
taxes $ (4,562) $ 529 $ (538) $ (13,062)
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
Net income (loss) $ (4,662) $ 454 $ (638) $ (13,362)
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
Loss per common share and
equivalents $ (1.30) $ (0.04) $ (0.30) $ (3.44)
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
Weighted average common
shares and equivalents 3,900,154 4,056,954 4,060,268 4,060,271
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
Common stock market price
range (high:low) 8:1 7/8 5 7/8:3 3/8 4 1/2:2 3/4 3 5/8:2 5/8
--------- ------------ ----------- -----------
--------- ------------ ----------- -----------
<FN>
(A) See Note 10 for discussion of special charges and unusual items recorded in
the fourth quarter.
</TABLE>
53
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1992
----
First Second Third Fourth
Quarter Quarter Quarter Quarter (A)
------- ------- ------- -----------
(in thousands except per share amounts and shares)
<S> <C> <C> <C> <C>
Revenue $ 48,805 $ 60,111 $ 54,307 $ 60,940
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Loss before income taxes $ (5,269) $ (149) $ (4,101) $ (49,552)
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Net loss $ (5,429) $ (269) $ (4,193) $ (49,785)
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Loss per common share and
equivalents $ (0.32) $ (0.02) $ (0.23) $ (2.77)
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Weighted average common
shares and equivalents 16,763,871 17,593,968 17,865,009 17,955,215
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Common stock market price
range (high:low) 2 1/2:1 3/8 2 1/8:1 1/4 1 5/8:1 1 1/4:7/8
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Retroactive effect of one-
for five reverse stock
split in January 1993:
Loss per common share and
equivalents $ (1.62) $ (0.08) $ (1.17) $ (13.86)
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Weighted average common
shares and equivalents 3,352,774 3,518,794 3,573,002 3,591,043
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Common Stock market price
range (high:low) 12 1/2:6 7/8 10 5/8:6 1/4 8 1/8:5 6 1/4:4 3/8
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
<FN>
(A) See Note 10 for discussion of special charges and unusual items recorded in
the fourth quarter.
</TABLE>
54
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
---------------
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
55
<PAGE>
GRUBB & ELLIS COMPANY
PART III
--------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The Board currently consists of six directors, following the resignation of John
Mullman, a representative of The Prudential Insurance Company of America
("Prudential"), in January 1994.
Joe F. Hanauer, 56, Chairman of the Board of the Company, has, since December
1988, been a general partner of Combined Investments, L.P., an investment
management business located in Laguna Beach, California, whose investments
include real estate. Since February 1993, Mr. Hanauer has served as a director
of certain subsidiaries of the Company and, through Combined Investments, L.P.,
has also provided operational and management services to the Company. From 1977
to December 1988, Mr. Hanauer was associated with Coldwell Banker Residential
Group, Inc., serving as Chairman and Chief Executive Officer from 1984. Since
March 1989, he has also been Chairman of the Greyhawk Corporation ("Greyhawk"),
a corporation of which he is a majority shareholder and which has interests in
real estate brokerage franchising. He is also a director of MAF Bancorp. Mr.
Hanauer was first elected as a director of the Company in January 1993 pursuant
to a stockholders' agreement among Warburg Pincus Investors, L.P. ("Warburg"),
Prudential, the Company and Mr. Hanauer dated as of January 29, 1993 (the
"Stockholders' Agreement").
Lawrence S. Bacow, 42, is a professor at the Massachusetts Institute of
Technology ("M.I.T.") Center for Real Estate and the M.I.T. Department of Urban
Studies and Planning. He joined the M.I.T. faculty in 1977 and the M.I.T.
Center for Real Estate in 1983, serving as the director of the Center for Real
Estate from 1990 until 1992. From December 1987 to June 1990, he was also a
principal of Artel Associates, a company which provided investment banking
services to real estate companies. Professor Bacow has served as a director of
the Company since January 1993.
56
<PAGE>
Kenneth E. Field, 50, has been President and Chief Executive Officer of
INVESCORP, Limited, a private merchant banking and real estate development
company located in Toronto, Ontario, Canada, since July 1989. Prior to that
time, he was a director of Bramalea Limited, a real estate development firm
located in Toronto, and served as its Chief Executive Officer from 1986 and
President from 1977. He is also a director and a majority shareholder of
Commercial Alcohols, Inc., an industrial fuel alcohol company. Mr. Field has
served as a director of the Company since 1988.
Reuben S. Leibowitz, 46, is a Managing Director of E.M. Warburg, Pincus & Co.,
Inc. ("Warburg Pincus"), a venture banking and investment counseling firm. He
has been associated with Warburg Pincus since 1984. Warburg Pincus is an
affiliate of Warburg, the Company's principal stockholder. Mr. Leibowitz is
also a director of Chelsea GCA Realty, Inc. Mr. Leibowitz was first elected as
a director of the Company in January 1993 as a representative of Warburg
pursuant to the Stockholders' Agreement.
John D. Santoleri, 30, has been a Vice President of Warburg, Pincus Ventures,
Inc., the venture banking subsidiary of Warburg Pincus, since 1991, and has been
associated with Warburg Pincus since June 1989. From June 1985 to June 1989, he
was associated with The Harlan Company, a New York-based real estate consulting
firm, and served there as Vice President from September 1988 to June 1989.
Warburg, Pincus Ventures, Inc. is an affiliate of Warburg, the Company's
principal stockholder. Mr. Santoleri also serves as a director of Chelsea GCA
Realty, Inc. Mr. Santoleri was first elected as a director of the Company in
January 1993 as a representative of Warburg pursuant to the Stockholders'
Agreement.
Wilbert F. Schwartz, 52, has been President and Chief Executive Officer of the
Company since February 1993. He will resign from such positions, which
resignation is expected to be effective July 1, 1994. He will remain a director
of the Company. He had been an employee of Prudential since 1976, serving as
Managing Director of its subsidiary, Prudential Investment Corp., from October
1991 until February 1993, and as President and Vice Chairman of Prudential's
Real Estate Affiliates division from March 1990 to October 1991. Mr. Schwartz
was first elected as a director of the Company in January 1993 as a
representative of Prudential, a principal stockholder of the Company.
57
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to Mr. Schwartz, the following are executive officers of the
Company:
John F. Carpenter, 47, has been President of the Company's Pacific
Northwest Region, a Senior Vice President of the Company, and Regional
Director of Investment Marketing in the commercial brokerage division since
October 1992. From September 1990 to September 1992, he was President and
Chief Executive Officer of Real Estate Investment Trust of California. He
was previously associated with the Company as a district manager from
January 1987 to August 1990. He joined the Company as a salesperson in
1979.
Robert J. Hanlon, Jr., 47, has been Senior Vice President and Chief
Financial Officer of the Company since December 1993. Prior to joining the
Company, Mr. Hanlon, who is a Certified Public Accountant, was employed by
Prudential for over 23 years, serving as Senior Vice President and Chief
Financial Officer of its affiliate, Prudential Capital Corporation, from
1985 through 1989 and as Executive Vice President, Finance and
Administration, of Prudential's affiliate, Prudential Relocation
Management, from 1990 through 1993.
Gordon M. Hess, 45, has been Chief Administrative Officer of the Company
since June 1993, and a Senior Vice President of the Company since January
1991. He was National Marketing Director of the Company's commercial
brokerage division from February 1992 to June 1993 and served as Vice
President of the Company from February 1989 to January 1991. From January
1989 to February 1992, he was Vice President of National/International
Accounts for the Company's Western Region. From February 1991 to February
1992, he was Vice President of Corporate Support Services and National
Retail Marketing for the Company. He joined the Honolulu office of the
Company in 1986 as Senior Vice President of the commercial brokerage
division and District Manager.
58
<PAGE>
Phillip D. Royster, 50, has been President of the Company's Pacific
Southwest Region since January 1992 and a Senior Vice President of the
Company since May 1990. He was President of the Company's California
Region from January 1990 to January 1992, and a Senior Vice President of
the Company's commercial brokerage division from February 1984 to May 1990.
Robert J. Walner, 47, has been Senior Vice President, Secretary and General
Counsel of the Company since January 1994. From August 1992 to January
1994, Mr. Walner was associated with Lawrence Walner & Associates, Ltd. in
Chicago, Illinois, a law firm specializing in state and federal class
action litigation on a national basis. From November 1979 to August 1992,
he was Senior Vice President, General Counsel and Secretary to the Balcor
Company, a subsidiary of American Express Company.
Neil R. Young, 45, has been President of the Company's Eastern Region since
March 1994, President of the Midwest/Texas Region since January 1993, and
a Senior Vice President of the Company since January 1992. Mr. Young has
been with the Company since 1983, serving prior to 1993 as an Executive
Vice President, Regional Manager, District Manager and Sales Manager of the
commercial brokerage division in the Midwest Region.
59
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Only directors who are not employees of the Company and who are neither
holders of five percent or more of the capital stock of the Company ("Five-
Percent Holders") nor employees or affiliates of entities which are Five-Percent
Holders ("Outside Directors"), receive compensation for serving on the Board and
on its committees. Such compensation currently consists of an annual retainer
fee of $15,000 and a fee of $1,000 for each Board or committee meeting attended.
These fees are set by the Board.
In addition, under the 1993 Stock Option Plan for Outside Directors, Outside
Directors each receive an option to purchase 10,000 shares of Common Stock of
the Company, $.01 par value ("Common Stock") upon the date of first election to
the Board, with an exercise price equal to market value on such date.
Pursuant to an agreement, effective as of February 1, 1993, between the
Company and Combined Investments, L.P., a company of which Mr. Hanauer is the
general partner, Mr. Hanauer devotes a substantial amount of his working time
providing operational and management services to the Company for compensation of
$15,000 per month plus expenses. During 1993, Combined Investments, L.P. earned
$165,000 under such agreement. The agreement is terminable by either party on
30 days' notice. Mr. Hanauer receives no other fees or compensation from the
Company for his service as Chairman of the Board.
60
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for all persons who served as Chief Executive
Officer in 1993 and each of the four most highly compensated other executive
officers of the Company (determined as of December 31, 1993), compensation
earned, including deferred compensation, for services in all capacities with the
Company and its subsidiaries for the fiscal years ended December 31, 1993, 1992,
and 1991. Two additional tables provide information about these employees'
stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------------------------------------ ---------------------------
Other Securities
Name Annual Under- All Other
and Compen- lying Compen-
Principal sation Options sation
Position Year Salary ($) Bonus ($) ($) SARS (#) ($) ($)
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wilbert F. Schwartz 1993 211,000 0 0 400,000 0
Chief Executive Officer (2) 1992 0 0 0 0 0
1991 0 0 0 0 0
Alvin L. Swanson, Jr. 1993 92,000 0 14,000 0 149,000
Former Chief Executive Officer (3) 1992 154,000 60,000 19,000 60,000 0
1991 0 0 12,000 0 0
Neil R. Young 1993 220,000 69,000 0 15,000 2,000(4)
President of the 1992 103,000 80,000 0 5,000(5) 0
Midwest/Texas Region 1991 73,000 82,000 0 800(5) 1,000(4)
J. David Dawson 1993 195,000 0 0 20,000 2,000(4)
President of the 1992 81,000 0 0 20,000(5) 0
Eastern Region 1991 0 0 0 0 0
John F. Carpenter 1993 171,000 9,000 0 15,000 1,000(4)
President of the 1992 39,000 0 0 0 0
Pacific Northwest Region 1991 0 0 0 0 0
Gordon M. Hess 1993 172,000 0 0 13,500 1,000(4)
Chief Administrative Officer 1992 174,000 0 0 5,000(5) 0
1991 157,000 0 0 800(5) 0
<FN>
(1) The amounts represent options to purchase the designated numbers of shares
of Common Stock, except with respect to Mr. Swanson, in which case the amounts
represent stock appreciation rights ("SARs").
(2) Mr. Schwartz was elected President and Chief Executive Officer in February
1993.
</FN>
61
<PAGE>
<FN>
(3) Mr. Swanson served as President and Chief Executive Officer between May
1992 through February 1993. Other annual compensation in 1993 relates to legal
expenses incurred in connection with his employment contract, and in 1991 and
1992 represents directors' fees. All other compensation relates to his
severance agreement, which includes $5,200 for health coverage.
(4) Represents Company contributions to the 401(k) plan accounts of the
designated individuals.
(5) These options were canceled in 1993 pursuant to a repricing program. The
repriced options are included in the 1993 grants of options.
</TABLE>
62
<PAGE>
63
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants For Option Term (1)
- - -----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Securities Total
Under- Options/
lying SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#)(2)(3) Year ($/Sh) Date 5%($) 10%($)
- - --------------------- ---------- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Wilbert F. Schwartz 400,000 77.4% $3.50 June 8, 2001 $595,000 $1,494,000
Alvin L. Swanson, Jr. -- -- -- -- -- --
Neil R. Young 15,000 2.9% $4.125 August 9, 2001 $ 30,000 $ 71,000
J. David Dawson 20,000 3.9% $4.125 August 9, 2001 $ 39,000 $ 94,000
John F. Carpenter 15,000 2.9% $4.125 August 9, 2001 $ 30,000 $ 71,000
Gordon M. Hess 13,500 2.6% $4.125 August 9, 2001 $ 27,000 $ 64,000
<FN>
(1) The potential realizable value is calculated from the market price per
share, assuming the Common Stock appreciates in value at the stated percentage
rate from the date of grant of an option or SAR to the expiration date. Actual
gains, if any, are dependent on the future market price of the Common Stock.
(2) The amounts represent options to purchase the designated numbers of shares
of Common Stock
</FN>
64
<PAGE>
<FN>
(3) The option of Mr. Schwartz was granted on June 8, 1993, and the options of
Messrs. Young, Dawson, Carpenter and Hess were granted on August 9, 1993, under
the 1990 Amended and Restated Stock Option Plan, as amended. The options were
each granted at market value on the date of grant, and vest in five, equal
annual installments commencing one year from the date of grant. Vesting
accelerates upon certain conditions related to changes of control of the Company
or at the discretion of the Compensation Committee. Upon termination of
Mr. Dawson's employment on April 30, 1994, all of the options held by him will
expire. In connection with the resignation of Mr. Schwartz, all of the options
held by him will be canceled.
</TABLE>
65
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable (1) Unexercisable (2)
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wilbert F. Schwartz -- -- 0/400,000 --
Alvin L. Swanson, Jr. -- -- 60,000/0 --
Neil R. Young -- -- 0/15,000 --
J. David Dawson -- -- 0/20,000 --
John F. Carpenter -- -- 0/15,000 --
Gordon M. Hess -- -- 0/13,500 --
<FN>
(1) Mr. Swanson was granted 60,000 SARs. The other amounts represent options
to purchase the designated numbers of shares of Common Stock.
(2) The value of unexercised in-the-money options and SARs at fiscal year-end
was calculated based on the closing price of the Common Stock as reported on the
New York Stock Exchange on December 31, 1993 ($3.125 per share).
</TABLE>
66
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into an agreement with Mr. Swanson as of May 20, 1992 in
connection with his services as President and Chief Executive Officer. Under
the agreement, he received a base salary of $250,000, health benefits and
$60,000 incentive compensation for services rendered during 1992. In addition,
pursuant to the agreement, 60,000 SARs were granted which expire seven years
from the date of grant and are exercisable for Common Stock or, in certain
circumstances, for cash. The exercise price of the SARs is generally equal to
the difference between the fair market value of a share of Common Stock at
exercise and $3.52. As of February 24, 1993, Mr. Swanson resigned as President
and Chief Executive Officer, and from that date until his resignation from all
positions with the Company on May 20, 1993, Mr. Swanson provided transitional
services and received a base salary of $200,000. Certain severance compensation
provisions of his employment agreement became effective upon Mr. Swanson's
termination of employment, including the extension of payments equal to his
original base salary until May 20, 1994, continuing health benefits until age 65
and acceleration of the vesting of his SARs. In the event that such severance
payments are deemed to constitute "excess parachute payments" as that term is
defined in Section 280G of the Internal Revenue Code, the Company is obligated
under such agreement to pay an additional amount equal to the federal excise tax
obligations of Mr. Swanson. Mr. Swanson's term as a director expired August 9,
1993.
Mr. Schwartz was elected President and Chief Executive Officer of the Company on
February 24, 1993, receiving an annual salary of $250,000, and eligibility for
incentive compensation in an amount of up to 60% of his salary in the discretion
of the Compensation Committee. In connection with his resignation from such
positions effective July 1, 1994, Mr. Schwartz will receive severance
compensation equal to one year's base salary and continued health benefits for
one year.
In connection with his resignation effective April 30, 1994, Mr. Dawson,
formerly President of the Eastern Region of the Company, will receive, pursuant
to an agreement, severance compensation equal to three and one-half months'
salary, a payment of $40,000 and a relocation allowance of up to $15,000.
67
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board ("Compensation
Committee") from January 29, 1993 through December 31, 1993 were Reuben S.
Leibowitz (Chairman), Lawrence S. Bacow and John Mullman, none of whom serve as
officers of the Company. John Mullman resigned from the Board in January 1994.
From January 1 through January 29, 1993, the members of the Compensation
Committee were Marvin M. Grove, Robert C. Kyle and Henry S. Miller, Jr., none of
whom served as officers of the Company.
Until May 1992, Mr. Miller was Chairman of HSM Inc., a subsidiary acquired by
the Company in August 1984.
In connection with an exchange of obligations with respect to certain
partnerships between HSM Inc. and David Donosky, the son-in-law of Mr. Miller
and former President of the Texas Region of the Company, Mr. Donosky owed, as of
March 1, 1994, outstanding principal and accrued interest of approximately
$147,000 to HSM Inc. The debt is non-recourse and due in 1996, bearing interest
at 11% per year. Mr. Donosky also borrowed $240,000 from the Company on a
recourse basis at a prime rate of interest and due in November of 1993, secured
by his rights to purchase 23,850 shares of Common Stock as a result of a stock
option exercise, at a weighted average exercise price of $14.50 per share. As
of March 1, 1994, the outstanding principal and accrued interest on this loan
was approximately $208,000. As a result of his failure to purchase and sell the
shares subject to the exercised stock option within one year of the exercise,
Mr. Donosky defaulted in his obligation to the Company for payment of the
purchase price of the shares in the aggregate amount of approximately $346,000,
and the shares were not issued. The indebtedness related to the partnerships
and the $240,000 loan had also been secured by a pledge of Mr. Donosky's non-
qualified options to purchase 20,000 shares of Common Stock at a weighted
average exercise price of $17.40 per share. These options expired upon
termination of Mr. Donosky's employment in January 1993. In February 1993, Mr.
Donosky filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.
68
<PAGE>
Mr. Leibowitz is a Managing Director of Warburg, Pincus & Co., Inc. an affiliate
of Warburg. Mr. Mullman is a Vice President, Corporate Finance of Prudential.
Warburg and Prudential entered into certain agreements with the Company in
connection with a recapitalization in 1993 and a restructuring of debt in 1994
as described below.
1993 RECAPITALIZATION. On January 29, 1993, the stockholders of the Company
approved a financial recapitalization and debt restructuring (the
"Recapitalization"), pursuant to which Warburg (for a purchase price of
$12,850,000) and Mr. Hanauer (for a purchase price of $900,000) purchased
(i) 128,266 and 8,894 shares, respectively, of newly issued Senior Preferred
Stock, (ii) five-year warrants initially to purchase 340,000 and 160,000 shares
of Common Stock, respectively, at an exercise price of $5.00 per share (the
$5.00 Warrants"), (iii) five-year warrants initially to purchase 142,000 and
58,000 shares of Common Stock, respectively, at an exercise price of $5.50 per
share (the "$5.50 Warrants, and, together with the $5.00 Warrants, the
"Warburg/Hanauer Warrants"), and (iv) subscription warrants ("Subscription
Warrants") to purchase 373,818 and 26,182 shares of Common Stock, respectively,
at an exercise price of $5.00 per share. The funds used by Warburg to purchase
the Senior Preferred Stock, the Warburg/Hanauer Warrants and the Subscription
Warrants were provided from Warburg's investment capital. Mr. Hanauer purchased
the Senior Preferred Stock, the Warburg/Hanauer Warrants and the Subscription
Warrants with funds borrowed in the ordinary course of business under
Mr. Hanauer's unsecured line of credit with First National Bank of Blue Island.
The Company owed approximately $530,000 to Warburg at December 31, 1993 for
reimbursement of its expenses related to the Recapitalization. As of April 1,
1994, such obligation had been paid. In connection with the Recapitalization,
the Company paid certain fees and expenses to an affiliate of Mr. Hanauer. See
"Item 13. Certain Relationships and Related Transactions."
Pursuant to the Recapitalization, the Company and Prudential agreed to
restructure an existing $5-million revolving line of credit (the "Old Revolving
Credit Note"), $10 million of existing 9.90% Senior Notes due November 1996 (the
"Senior Notes") and $25 million of existing 10.65% Subordinated Notes due
November 1996 (the "Subordinated Notes") held by Prudential. Prudential and the
Company entered into a Senior Note, Subordinated Note and Revolving Credit Note
Agreement (the "New Note Agreement") pursuant to which the Company issued to
Prudential (i) a new $5-million Revolving Credit Note due December 31, 1994 (the
"New Revolving Credit Note") upon cancellation of the Old Revolving Credit Note,
(ii) $10 million of the Company's 9.9% Senior Notes due November 1, 1996 (the
"New Senior Notes") upon cancellation of all
69
<PAGE>
of the outstanding Senior Notes and (iii) $10 million of the Company's 10.65%
Subordinated Payment-in-Kind Notes due November 1, 1999 (the "PIK Notes") upon
conversion of $10 million of the Subordinated Notes. In addition, prior to the
Recapitalization, Prudential held warrants (the "Old Prudential Warrants") to
purchase 397,549 shares of Common Stock at an exercise price of $7.30 per share,
which Prudential agreed to exercise through the cancellation of approximately
$1,982,000 of the accrued and unpaid interest on the Subordinated Notes and
cancellation of approximately $920,000 of PIK Notes. In addition, Prudential,
in exchange for the cancellation of $15 million of Subordinated Notes, purchased
(x) 150,000 newly issued shares of Junior Preferred Stock and (y) five-year
warrants initially to purchase 200,000 shares of Common Stock at an exercise
price of $5.50 per share (the "Prudential $5.50 Warrants"). The Company
reimbursed Prudential for approximately $206,000 of its out-of-pocket costs and
expenses incurred in connection with the Recapitalization.
As part of the Recapitalization, Warburg, Prudential, Mr. Hanauer and the
Company entered into a stockholders' agreement (the "Stockholders' Agreement"),
which provides for the nomination of up to three persons for election as
director by Warburg and up to two persons for election as director by
Prudential. Pursuant to the Stockholders' Agreement, Mr. Leibowitz was
nominated for election as a director by Warburg, and Mr. Mullman was nominated
for election as a director by Prudential.
On July 1, 1993, Warburg and Mr. Hanauer sold an aggregate of 1,193 shares of
Senior Preferred Stock, $5.00 Warrants to purchase 4,350 shares, $5.50 Warrants
to purchase 1,740 shares, and Subscription Warrants to purchase 3,480 shares of
Common Stock to Wilbert F. Schwartz, President and Chief Executive Officer of
the Company, for a purchase price of approximately $120,000, which was
approximately equal to the consideration paid by Warburg and Mr. Hanauer upon
their acquisition of such securities. In connection with the resignation of
Mr. Schwartz, he has agreed to resell such securities to Warburg and Mr. Hanauer
for the same purchase price that he paid upon acquisition of such securities.
70
<PAGE>
1994 DEBT RESTRUCTURING. During March 1994, the Company, Warburg and Prudential
entered into an agreement in principle (the "Agreement") pursuant to which the
New Note Agreement was amended to provide that the Company will not be required
to make principal payments on any of the Prudential debt prior to November 1,
1997. Thereafter, the revolving credit facility will mature on November 1,
1999, principal on the New Senior Notes will be payable in two equal
installments on November 1, 1997 and 1998, and principal on the PIK Notes will
be payable in two approximately equal installments on November 1, 2000 and 2001.
The interest rate on the PIK Notes will increase from 10.65 % to 11.65% per
annum on January 1, 1996. In addition, certain covenants of the New Note
Agreement will remain in place, but will not be in effect until April 1, 1997.
The New Note Agreement, as amended, provides for supplemental principal payments
commencing July 1, 1998 if the Company meets certain financial tests. The
Agreement also provides a financing commitment from Warburg for a $10 million
interim loan which is expected to be retired in connection with a proposed sale
of rights to acquire Common Stock of the Company. Warburg has agreed to loan
the Company up to $10 million at an initial interest rate of 5% per annum with a
maturity date of April 28, 1995. The interest rate will increase to 10% per
annum in the event that stockholder approval of certain of the transactions
contemplated by the Agreement is not obtained. Interest on the loan will be due
upon maturity or upon refinancing, whichever occurs first. The loan will be
secured by the Company's commercial brokerage revenues through a cash collateral
account. Prudential also will have a lien on the cash collateral account which
will be subordinated to Warburg's loan.
The Agreement also provides for the Company to seek additional equity capital
through a rights offering, and contemplates that the Company would issue to
holders of the Common Stock, for each share of Common Stock held, a non-
transferable right to acquire one share of Common Stock, at an exercise price
tentatively set at $2.375 per share. Subject to certain conditions,
stockholders also would have certain rights to oversubscribe to the extent that
other stockholders do not subscribe. Warburg has agreed to acquire the Common
Stock not acquired by the holders of Common Stock in the rights offering through
the conversion of its loan up to an amount not exceeding $10 million plus
accrued interest on the loan. Pursuant to the Agreement, the rights offering
would occur after the Company obtains the approval of the transactions
contemplated by the Agreement from the holders of a majority of the shares of
the Company's voting stock, including a majority of the holders of the shares of
the Company's voting stock other than Warburg and Prudential. Accordingly,
there can be no assurance that such approval will be obtained.
71
<PAGE>
The Agreement also contemplates certain amendments to the existing Senior
Preferred Stock held by Warburg and the Junior Preferred Stock held by
Prudential (together, the "Preferred Stock"). Both series of Preferred Stock
would be amended to be non-redeemable. As of the date of the rights offering,
the exercise prices on the outstanding Warrants held by Prudential and Warburg
would be reduced to $3.50 per share pursuant to the terms of such Warrants,
except that the exercise price on the Subscription Warrants to purchase 370,566
shares held by Warburg, which are exercisable only under specified
circumstances, would be reduced to the same price per share as the rights
offering. As it relates to the rights offering, Warburg will retain certain
anti-dilution rights with respect to the preferred stock and Warrants which it
currently holds. Thereafter, the Preferred Stock and Warrants held by Warburg
would be amended to eliminate the anti-dilution provisions with respect to the
issuance of Common Stock and Common Stock equivalents at less than the
conversion price or exercise price.
The Preferred Stock and the outstanding Warrants held by Prudential would be
amended to eliminate the anti-dilution provisions with respect to the issuance
of Common Stock and Common Stock equivalents at less than the conversion price
or exercise price. The Junior Preferred Stock also would be amended to increase
the dividend rate to 10% per annum effective January 1, 2002, with further
increases of 1% per year effective January 1, 2003 and January 1, 2004, and 2%
per year effective January 1, 2005 and each January 1 thereafter. The Senior
Preferred Stock would be amended to provide that at such time as the dividend
rate on the Junior Preferred Stock would increase above 12%, the dividend rate
on the Senior Preferred Stock would increase by the same amount as the dividend
rate on the Junior Preferred Stock. The Junior Preferred Stock also would be
amended to provide that under certain circumstances following the conversion of
the Senior Preferred Stock, holders of the Junior Preferred Stock will be
obligated to convert such preferred stock.
In consideration of their agreements, the Company would grant Warburg and
Prudential warrants to purchase approximately 325,000 and 150,000 shares of
Common Stock of the Company, respectively. The exercise price of these warrants
would be equal to the rights offering price.
In the ordinary course of business, Prudential, its affiliates and franchisees
paid the Company approximately $4.6 million during 1993 for management of
several of its properties and for leasing commissions. The Company also rents
office space in the ordinary course of business under a long-term lease from a
partnership of which Prudential is a general partner, paying approximately
$1,312,000 in rent during 1993.
72
<PAGE>
A limited partnership which is affiliated with the Company is a partner in a
joint venture formed to develop an office building in southern California. As a
permanent financing for the project, the joint venture borrowed $5.8 million on
a non-recourse basis from Prudential in September 1990, secured by an
unamortized first mortgage on the property, at a rate of 10.02% per year and a
term of five years. As of June 1, 1994, the outstanding principal amount on the
note was $5.8 million.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of March 1, 1994 concerning
beneficial ownership of Common Stock by known beneficial holders of more than 5%
of the outstanding Common Stock, directors, named executive officers, and all
current directors and executive officers as a group. Unless otherwise noted,
the listed persons have sole voting and dispositive powers with respect to the
shares held in their names, subject to community property laws if applicable.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Percent of Class (1)
-------------------- --------------------
<S> <C> <C>
Warburg, Pincus Investors, L.P.
466 Lexington Avenue,
New York, NY 10017 5,067,425 (2)(5) 55.5%
The Prudential Insurance
Company of America
Four Gateway Center
Newark, NJ 07102 3,272,060 (3)(5) 47.2%
Joe F. Hanauer
Combined Investments, L.P.
361 Forest Ave., Suite 200
Laguna Beach, CA 92651 555,773 (4)(5) 12.1%
FMR Corp.
82 Devonshire Street
Boston, MA 02109-3614 307,600 (6) 7.6%
Lawrence S. Bacow 4,134 (7)(8) *
John F. Carpenter 638 (6) *
J. David Dawson 637 (8) *
Kenneth E. Field 27,137 (9) *
Gordon M. Hess 1,538 (8) *
Reuben S. Leibowitz -0- (2) --
John D. Santoleri -0- (2) --
Wilbert F. Schwartz 45,676 (10) 1.1%
Alvin L. Swanson, Jr. 81,804 (11) 2.0%
Neil R. Young 3,082 *
All current directors and executive
officers as a group (13 persons) 639,487 (8) 13.8%
<FN>
* Does not exceed 1.0%.
</FN>
73
<PAGE>
<FN>
(1) Percentages total more than 100% due to the requirement to count
derivative securities for certain purposes. The percentages of shares
of Common Stock beneficially owned by the designated persons assumes
that no other person exercises currently outstanding warrants or
options or convertible securities.
(2) At March 1, 1994, Warburg beneficially owned 5,067,425 shares of
Common Stock through its ownership of (i) 127,150 shares of Senior
Preferred Stock which are convertible into an aggregate of 4,219,052
shares of Common Stock, (ii) currently exercisable warrants to
purchase an aggregate of 477,807 shares of Common Stock, and
(iii) Subscription Warrants which will be exercisable to purchase
370,566 shares of Common Stock only in the event the Company pays
certain liabilities after January 29, 1993 which exceed an aggregate
of $1,500,000. Such Subscription Warrants, with an aggregate exercise
price equal to 92.64% of the amount by which such excess liabilities
exceed $500,000, will be exercisable by Warburg for a period of 90
days.
The sole general partner of Warburg is Warburg, Pincus & Co., a
New York general partnership ("WP"). E.M. Warburg, Pincus & Company,
a New York general partnership that has the same general partners as
WP ("E.M. Warburg"), manages Warburg. Lionel I. Pincus is the
managing partner of WP and E.M. Warburg and may be deemed to control
them. WP has a 20% interest in the profits of Warburg and, through
its wholly-owned subsidiary, E.M. Warburg, Pincus & Co., Inc.
("Warburg Pincus"), owns 1.13% of the limited partnership interests in
Warburg. Mr. Leibowitz, a director of the Company, is a Managing
Director of Warburg Pincus and a general partner of WP and E.M.
Warburg. As such, he may be deemed to be a beneficial owner of an
indeterminate portion of the shares of Common Stock beneficially owned
by Warburg, Warburg Pincus and WP. He disclaims any such beneficial
ownership. Mr. Santoleri, a director of the Company, is a Vice
President of Warburg, Pincus Ventures, Inc., which is an affiliate of
Warburg. Mr. Santoleri disclaims beneficial ownership of any shares
of Common Stock beneficially owned by Warburg.
</FN>
74
<PAGE>
<FN>
(3) At March 1,1994, Prudential beneficially owned 3,272,060 shares of
Common Stock through its ownership of (i) 397,549 shares of Common
Stock, (ii) 150,000 shares of Junior Preferred Stock which are
convertible into an aggregate of 2,674,511 shares of Common Stock, and
(iii) currently exercisable warrants to purchase an aggregate of
200,000 shares of Common Stock.
(4) At March 1, 1994, Mr. Hanauer, a director and Chairman of the Company,
beneficially owned 555,773 shares of Common Stock, through his
ownership of the following securities held in a trust of which
Mr. Hanauer is the trustee and he and his wife and children are
beneficiaries: (i) 21,153 shares of Common Stock, (ii) 8,817 shares
of Senior Preferred Stock convertible into an aggregate of 292,563
shares of Common Stock, (iii) currently exercisable warrants to
purchase an aggregate of 216,103 shares of Common Stock, and
(iv) Subscription Warrants to purchase 25,954 shares of Common Stock,
which will be exercisable only in the event the Company pays certain
liabilities after January 29, 1993 which exceed an aggregate of
$1,500,000. Such Subscription Warrants, with an aggregate exercise
price equal to 6.49% of the amount by which such excess liabilities
exceed $500,000, will be exercisable by Mr. Hanauer for a period of 90
days.
(5) Pursuant to the rules promulgated under the Securities Exchange Act of
1934, as amended, Prudential, Warburg and Mr. Hanauer may be deemed to
be a "group," as defined in Section 13(d) of such Act. Prudential,
Warburg and Mr. Hanauer do not affirm the existence of such a group
and disclaim beneficial ownership of shares of Common Stock
beneficially owned by any other party.
(6) Includes 203,500 shares held by affiliates of FMR Corp., which is a
holding company for certain investment advisors. Information with
respect to FMR Corp. is based on the most recent Schedule 13D filed
with the Securities and Exchange Commission reflecting beneficial
ownership of Common Stock.
(7) Includes an option under a Company stock option plan which, as of
March 1, 1994, was exercisable for 3,334 shares.
(8) Includes, in the aggregate, 838 shares held by immediate family
members of, and 424 shares held jointly with immediate family members
by, all current directors and executive officers as a group.
(9) Includes 10,120 shares held by a corporation of which Mr. Field is
President and sole shareholder.
</FN>
75
<PAGE>
<FN>
(10) At March 1, 1994 Mr. Schwartz beneficially owned 45,676 shares of
Common Stock, through his ownership of 1,193 shares of Senior
Preferred Stock convertible into an aggregate of 39,586 shares of
Common Stock and currently exercisable warrants to purchase an
aggregate of 6,090 shares of Common Stock. Mr. Schwartz also holds
Subscription Warrants to purchase 3,480 shares of Common Stock which
will be exercisable only in the event that the Company pays certain
liabilities after January 29, 1993 which exceed an aggregate of
$1,500,000. Such Subscription Warrants, with an aggregate exercise
price equal to .87% of the amount by which such excess liabilities
exceed $500,000, will be exercisable by Mr. Schwartz for a period of
90 days. In connection with the resignation of Mr. Schwartz, he has
agreed to resell such securities to Warburg and Mr. Hanauer for the
same purchase price that he paid upon acquisition of such securities.
Includes 60,000 currently exercisable stock appreciation rights
("SARs") held by Mr. Swanson which fully vested upon his resignation
on May 20, 1993. The SARs are generally exercisable for shares of
Common Stock with an aggregate fair market value equal to the excess
of the fair market value of the Common Stock over $3.52.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following are descriptions of certain transactions and business relationships
between the Company and its directors, executive officers and principal
stockholders. See also "Compensation Committee Interlocks and Insider
Participation."
In May 1992, the Company entered into an agreement with the Meredith
Corporation's operating group known as "Better Homes and Garden Real Estate
Service" ("BH&G") whereby certain residential brokerage offices of the Company
in California and BH&G agreed to jointly offer marketing, training and other
support services to independent brokerage firms. Under the agreement, the
Company will be paid fees by Meredith Corporation based upon the performance of
the independent firms involved, and will, after the first year of the agreement,
be obligated to pay fees to Meredith Corporation based upon the Company's gross
revenue for the offices participating in the program. To date, no fees have
been paid to the Company by Meredith Corporation and the Company has not paid
any fees to Meredith Corporation. The Company believes the program with
Meredith Corporation will assist the participating offices to be more
competitive and will permit the Company to profit as a result of offering
mortgage services to
76
<PAGE>
Meredith Corporation franchisees. Meredith Corporation and Greyhawk, a
corporation of which Mr. Hanauer is a majority shareholder and chairman of the
board, are parties to certain agreements pursuant to which Greyhawk has agreed
to assist Meredith Corporation in developing its Better Homes and Gardens
franchises in several U.S. markets. Greyhawk has not to date received any fees
based on amounts received by Meredith Corporation from the Company, but will be
entitled to receive such fees in the future.
In connection with the Recapitalization, Greyhawk was paid a fee of
$325,000 by the Company related to its efforts in introducing to the Company
various potential investors, including Warburg. An additional $46,000 was paid
by the Company to Greyhawk as reimbursement of travel and legal expenses related
to these efforts.
- - --------------------------------------------------------------------------------
77
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
1. The following Reports of Independent Auditors and Consolidated
Financial Statements are submitted herewith:
- Reports of Independent Auditors.
- Consolidated Balance Sheets at December 31, 1993 and
December 31, 1992.
- Consolidated Statements of Operations for the years ended
December 31, 1993, 1992 and 1991.
- Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1993, 1992 and 1991.
- Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991.
- Notes to Consolidated Financial Statements.
2. The following Consolidated Financial Statement Schedules are submitted
herewith:
II. Amounts Receivable from Related Parties and Underwriters,
Promoters and Employees Other Than Related Parties at
December 31, 1993, 1992 and 1991.
VII. Guarantees of Securities of Other Issuers at December 31, 1993.
VIII. Valuation and Qualifying Accounts
IX. Short Term Borrowings
X. Supplementary Income Statement Information for the years ended
December 31, 1993, 1992 and 1991.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Certificate of Incorporation of the Registrant, as restated
effective December 8, 1993, incorporated herein by reference
to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
filed on March 31, 1994 (Commission File No. 1-8122).
3.2 Grubb & Ellis Company Bylaws, as amended effective August 9, 1993,
incorporated herein by reference to Exhibit 4.4 to the
78
<PAGE>
Registrant's registration statement on Form S-8 filed on
November 12, 1993
(Registration No. 33-71484).
3.3 Amendment to the Grubb & Ellis Company Bylaws, effective as of
August 9, 1993, incorporated herein by reference to Exhibit 4.5 to
the Registrant's registration statement on Form S-8 filed on
November 12, 1993. (Registration No. 33-71484).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4.1 Senior Note, Subordinated Note and Revolving Credit Note Agreement
between The Prudential Insurance Company of America and the
Registrant dated as of November 2, 1992, incorporated herein by
reference to Exhibit 4.6 to the Registrant's Current Report on Form
8-K filed on February 8, 1993 (Commission File No. 1-8122).
4.2 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated March 26, 1993, incorporated herein by
reference to Exhibit 4.10 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122).
4.3 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated April 19, 1993, incorporated herein by
reference to Exhibit 4.11 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122).
4.4 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated October 26, 1993, incorporated herein by
reference to Exhibit 4.21 to the Registrant's registration statement
on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
4.5 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated March 28, 1994, incorporated herein by
by reference to Exhibit 4.5 to the Registrant's Annual Report on
Form 10-K filed on March 31, 1994 (Commission File No. 1-8122).
4.6 Securities Purchase Agreement between The Prudential Insurance
Company of America and the Registrant, dated as of November 2, 1992,
incorporated herein by reference to Exhibit 28.4 to the Registrant's
Current Report on Form 8-K filed on November 12, 1992 (Commission
File No. 1-8122).
4.7 Specimen of stock subscription warrant No. 5 issued to The
Prudential Insurance Company of America, dated January 29, 1993,
exercisable for 200,000 shares of the Registrant's Common Stock,
incorporated by reference to Exhibit 28.10 to the Registrant's
Current Report on Form 8-K filed on February 8, 1993 (Commission
File No. 1-8122).
4.8 Securities Purchase Agreement among Warburg, Pincus Investors, L.P.,
Joe F. Hanauer and the Registrant, dated as of November 2, 1992,
incorporated herein by reference to Exhibit 28.3 to the Registrant's
Current Report on Form 8-K filed on November 12, 1992 (Commission
File No. 1-8122).
4.9 Specimen of stock subscription warrant No. 6 issued to Warburg,
Pincus Investors, L.P., dated as of January 29, 1993, exercisable
79
<PAGE>
for 337,042 shares of the Registrant's Common Stock, incorporated
herein by reference to Exhibit 4.11 to the Registrant's registration
statement on Form S-8 filed on November 12, 1993 (Registration
No. 33-71484).
4.10 Specimen of stock subscription warrant No. S-3 issued to Warburg,
Pincus Investors, L.P., dated January 29, 1993, exercisable for
370,566 shares of the Registrant's Common Stock, incorporated herein
by reference to Exhibit 4.17 to the Registrant's registration
statement on Form S-8 filed on November 12, 1993 (Registration
No. 33-71484).
4.11 Summary of terms of proposed bridge loan and rights offering
executed by Warburg, Pincus Investors, L.P., The Prudential
Insurance Company of America and the Registrant as of March 28,
1994, incorporated herein by reference to Exhibit 4.11 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1994
(Commission File No. 1-8122).
4.12 Cash Collateral Account Agreement between Bank of America N.T.&S.A.
and the Registrant dated as of March 29, 1994, incorporated herein
by reference to Exhibit 4.12 to the Registrant's Annual Report
on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122).
4.13 Intercreditor Agreement between Warburg, Pincus, Investor, L.P. and
The Prudential Insurance Company of America dated as of March 28,
1994, incorporated herein by reference to Exhibit 4.13 to the
registrant's Annual Report on Form 10-K filed on March 31, 1994
(Commission File No. 1-8122).
4.14 Promissory Note in the amount of $250,000 dated as of January 8,
1990 executed by the Registrant in favor of DW Limited Partnership,
incorporated herein by reference to Exhibit 4.14 to the Registrant's
Annual Report on Form 10-K filed on March 31, 1994 (Commission File
No. 1-8122).
4.15 Promissory Note in the amount of up to $10 million dated as of
March 29, 1994, executed by the Registrant in favor of Warburg,
Pincus Investors, L.P., incorporated herein by reference to
Exhibit 4.15 to the Registrant's Amendment to its Annual Report
on Form 10-K/A filed on April 29, 1994 (Commission File
No. 1-8122).
4.16 Loan and Security Agreement among the Registrant, Warburg Pincus
Investors, L.P. and The Prudential Insurance Company of America
dated as of March 29, 1994, incorporated herein by reference
to Exhibit 4.16 to the Registrant's Amendment to its Annual Report
on Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122).
4.17 Modification to Note and Security Agreement between the Registrant
and The Prudential Insurance Company of America dated as of March
28, 1994, incorporated herein by reference to Exhibit 4.17 to the
Registrant's Amendment to its Annual Report on Form 10-K/A filed
on April 29, 1994 (Commission file No. 1-8122).
On an individual basis, instruments other than Exhibits listed above
defining the rights of holders of long-term debt of the Registrant
and its consolidated subsidiaries and partnerships do not exceed ten
percent of total consolidated assets and are, therefore, omitted;
however, the Company will furnish supplementally to the Commission
any such omitted instrument upon request.
(10) MATERIAL CONTRACTS
10.1 Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan,
as amended as of August 9, 1993, incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-8
filed on November 12, 1993 (Registration No. 33-71580).
10.2 Grubb & Ellis Company Executive Supplemental Deferred Compensation
Plan, incorporated herein by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-2 filed on January 12,
1990 (Registration No. 33-32979).
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<PAGE>
10.3 Grubb & Ellis Company 1985 Restricted Value Stock Plan, as amended
effective December 3, 1987, incorporated herein by reference to
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K filed
on March 31, 1989 (Commission File No. 1-8122).
10.4 Agreement between HSM Inc. and David Donosky dated January 15,
1988, regarding exchange of indebtedness, incorporated herein by
reference to Exhibit 10.23 to the Registrant's Annual Report on
Form 10-K filed on March 30, 1988 (Commission File No. 1-8122).
10.5 Loan Agreement between David Donosky and the Registrant dated
October 20, 1989, incorporated herein by reference to Exhibit 10.21
to the Registrant's registration statement on Form S-2 filed on
January 12, 1990 (Registration No. 33-32979).
10.6 Description of Grubb & Ellis Company Senior Management Compensation
Plan, incorporated herein by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K filed on March 30, 1992
(Commission File No. 1-8122).
10.7 Stock Purchase and Stockholder Agreement dated May 6, 1992, among GE
New Corp., the Registrant and International Business Machines
Corporation, incorporated herein by reference to Exhibit 28.2 to the
Registrant's Quarterly Report on Form 10-Q filed on May 15, 1992
(Commission File No. 1-8122).
10.8 Master Management Agreement dated May 6, 1992 between International
Business Machines Corporation and GE New Corp., incorporated herein
by reference to Exhibit 28.2 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1992 (Commission File No. 1-8122).
10.9 Master Financing Agreement dated August 5, 1992 between IBM Credit
Corporation and Axiom Real Estate Management, Inc., incorporated
herein by reference to Exhibit 28.4 to the Registrant's Quarterly
Report on Form 10-Q filed on August 13, 1992 (Commission File
No. 1-8122).
10.10 Credit Agreement dated as of August 31, 1992, between Axiom Real
Estate Management, Inc. and the Registrant, incorporated herein by
reference to Exhibit 28.6 to the Registrant's Quarterly Report on
Form 10-Q filed on November 16, 1992 (Commission File No. 1-8122).
10.11 Purchase Agreement dated February 16, 1993 between the Registrant
and JMB Institutional Realty Advisers, L.P., incorporated herein by
reference to Exhibit 10.20 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-1822).
10.12 Purchase Agreement dated March 4, 1993 between the Registrant and
Fox and Carskadon/Better Homes and Gardens, incorporated herein by
reference to Exhibit 10.21 to the Registrant's Quarterly Report on
Form 10-Q filed May 15, 1993 (Commission File No. 1-1822).
10.13 Stockholders' Agreement among Warburg, Pincus Investors, L.P., The
Prudential Insurance Company of America, Joe F. Hanauer and the
Registrant dated January 29, 1993, incorporated herein by reference
to Exhibit 28.1 to the Registrant's Current Report on Form 8-K filed
on February 8, 1993 (Commission File No. 1-8122).
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<PAGE>
10.14 Amendment to Stockholders' Agreement among Warburg, Pincus
Investors, L.P., The Prudential Insurance Company of America, Joe F.
Hanauer and the Registrant, dated as of July 1, 1993, incorporated
herein by reference to Exhibit 10.15 to the Registrant's Quarterly
Report on Form 10-Q filed on August 16, 1993 (Commission File
No. 1-8122).
10.15 Severance Compensation Agreement, dated as of December 31, 1992,
between the Registrant and Donald L. McGee, incorporated herein by
reference to Exhibit 10.25 to the Registrant's Annual Report on Form
10-K filed on April 15, 1993 (Commission File No. 1-8122).
10.16 Severance Compensation Agreement, dated as of August 31, 1992,
between the Registrant and Emmett R. DeMoss, Jr., incorporated
herein by reference to Exhibit 10.26 to the Registrant's Annual
Report on Form 10-K filed on April 15, 1993 (Commission File
No. 1-8122).
10.17 Severance Compensation Agreement, dated as of December 31, 1992,
between the Registrant and Donald V. Jones, incorporated herein by
reference to Exhibit 10.27 to the Registrant's Annual Report on Form
10-K filed on April 15, 1993 (Commission File No. 1-8122).
10.18 Amendment No. 1 to Severance Compensation Agreement, dated as of
December 31, 1992, between the Registrant and Donald V. Jones,
incorporated herein by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K filed on April 15, 1993
(Commission File No. 1-8122).
10.19 Employment Agreement, effective May 20, 1992, between the Registrant
and Alvin L. Swanson, Jr., incorporated herein by reference to
Exhibit 10.29 to the Registrant's Annual Report on Form 10-K filed
on April 15, 1993 (Commission File No. 1-8122).
10.20 First Amendment to Employment Agreement, effective as of May 20,
1992, between the Registrant and Alvin L. Swanson, Jr., incorporated
herein by reference to Exhibit 10.30 to the Registrant's Annual
Report on Form 10-K filed on April 15, 1993 (Commission File
No. 1-8122).
10.21 Second Amendment to Employment Agreement, effective as of February
24, 1993, between the Registrant and Alvin L. Swanson, Jr.,
incorporated herein by reference to Exhibit 10.31 to the
Registrant's Quarterly Report on Form 10-Q filed on May 15, 1993
(Commission File No. 1-8122).
10.22 1993 Stock Option Plan for Outside Directors, incorporated herein by
reference to Exhibit 4.1 to the Registrant's registration statement
on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
10.23 Separation Agreement between the Registrant and Wilbert F. Schwartz
dated as of April 25, 1994, incorporated herein by reference to
Exhibit 10.23 to the Registrant's Amendment to its Annual Report
on Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122).
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS, incorporated
herein by reference to Exhibit 11 to the Registrant's Annual Report
on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122).
(21) SUBSIDIARIES OF THE REGISTRANT, incorporated herein by reference to
Exhibit 21 to the Registrant's Annual Report on Form 10-K filed on
March 31, 1994 (Commission File No. 1-8122).
(23.1) CONSENTS OF INDEPENDENT AUDITORS - Ernst & Young
(23.2) CONSENTS OF INDEPENDENT AUDITORS - Coopers & Lybrand
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<PAGE>
23.1 Consent of Ernst & Young
23.2 Consent of Coopers & Lybrand
(24) POWERS OF ATTORNEY
(b) Reports on Form 8-K:
None.
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 30th day of March,
1994.
GRUBB & ELLIS COMPANY
(Registrant)
by *
------------------------------------
Wilbert F. Schwartz
President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
March 30, 1994
- - --------------------------------------
Robert J. Hanlon, Jr.
Chief Financial Officer and
Senior Vice President
March 30, 1994
- - --------------------------------------
Connie Hardisty
Vice President and
Corporate Controller
* March 30, 1994
- - --------------------------------------
Joe F. Hanauer, Chairman of the Board
and Director
* March 30, 1994
- - --------------------------------------
Kenneth E. Field, Director
* March 30, 1994
- - --------------------------------------
Reuben S. Leibowitz, Director
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<PAGE>
* March 30, 1994
- - --------------------------------------
John D. Santoleri, Director
* March 30, 1994
- - --------------------------------------
Lawrence S. Bacow, Director
*Pursuant to Powers of Attorney
- - --------------------------------------
By: Robert J. Walner, Attorney-in-Fact
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<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM
RELATED PARTIES AND UNDERWRITERS
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
---------- ---------- ---------- ---------- -----------
Balance at Amounts
Name of beginning Amounts Written- Non-
Debtor of Period Additions Collected Off Current Current
---------- ---------- ---------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 Donosky,
David (A) $265 - - - - - - $265 - -
Sineni,
Tom 253 - - 15 238 - - - -
Clark,
Carl (A) 229 - - - - - - 229 - -
9800
Townpark 118 - - - - 118 - - - -
1992 Donosky,
David (B) $313 $ 14 $ 18 $ 44 $265 - -
Sineni
Tom (B) 89 179 15 - - 253 - -
Clark,
Carl (B) 59 170 - - - - 229 - -
9800
Townpark (B) - - 118 - - - - 118 - -
1991 Donosky,
David $384 $ 25 $ 96 - - $313 - -
<FN>
(A) The balances owed by these parties were fully reserved for at December 31,
1993.
(B) The balances owed by these parties were fully reserved for at December 31,
1992.
</TABLE>
86
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
- - -------- -------- -------- -------- -------- -------- --------
Name of Issuer Title of Nature of any Default by
of Securities Issue of Total Amount Owned by Amount in Issuer of Securities
Guaranteed by Each Class Amount Person or persons Treasury of Guaranteed in Principal,
Person for of Guaranteed for which Issuer of Interest, Sinking Fund or
which Statement Securities and the Statement Securities Nature of Redemption Provisions,
is Filed Guaranteed Outstanding is Filed Guaranteed Guarantee or Payment of Dividends
- - ---------------- ---------- ----------- ----------------- ----------- --------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Economy Federal
Savings and Loan
Association of
St. Louis (A) $ 499 (C)
Jacksonville
Hotel Associates (B) 13 (D)
-----------
$ 512
-----------
-----------
<FN>
Grubb & Ellis Company and Subsidiaries, Notes to Schedule VII:
(A) Mortgage loans payable.
(B) Telephone equipment lease.
(C) Mortgage loan principal and interest.
(D) Lease payments.
</TABLE>
87
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ---------------------------- ---------- ------------ -------------- ----------
Additions Deductions
------------ --------------
Amounts
written off or
Balance at Charged to recovered upon Balance at
beginning costs and repayment of end of
Description of period expenses (1) receivable (1) period
- - ---------------------------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
Allowance for uncollectible
real estate brokerage
commissions receivable (1)
- - ----------------------------
Year ended December 31, 1993: 5,002 25 5,027
Year ended December 31, 1992: 3,182 1,820 5,002
Year ended December 31, 1991: 4,301 1,119 3,182
Reserves on real estate
investments and real
estate owned
- - ----------------------------
Year ended December 31, 1993: 6,366 2,574 3,792
Year ended December 31, 1992: 4,255 2,987 876 6,366
Year ended December 31, 1991: 5,104 3,048 3,897 4,255
<FN>
(1) The above additions and deletions have been presented as a net balance due
to limitations in the Company's computer systems.
</TABLE>
88
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE IX -SHORT TERM BORROWINGS
FOR THE YEAR ENDED DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- --------- --------
Maximum amount Average amount Weighted
Balance at Weighted outstanding outstanding average interest
Category of aggregate end of average during the during the rate during
short-term borrowings period interest rate period period (1) the period (1)
- - --------------------- ------ ------------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Year-ended December 31, 1993:
Revolving Line of Credit -
Non-bank Financial Institution 5,000,000 5.89% 5,000,000 3,416,667 5.30%
Year ended December 31, 1992:
Revolving Line of Credit -
Non-bank Financial Institution 5,000,000 7.10% 5,000,000 5,000,000 7.33%
<FN>
(1) The average amount outstanding and weighted average interest rate during
the period were computed based on month-end amounts.
</TABLE>
89
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
<TABLE>
<CAPTION>
COLUMN A COLUMN B
Description Charged to Costs and Expenses(A)
- - ----------- -----------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Advertising Costs $4,998 $6,225 $7,774
Goodwill Amortization $ 402 $1,218 $2,850
<FN>
(A) Amounts for maintenance and repairs, depreciation and amortization of
intangible assets (other than goodwill), taxes other than payroll and
income taxes and royalties are not presented as such amounts are less than
1% of total sales and revenue.
</TABLE>
90
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT INDEX(A)
FOR THE YEAR ENDED DECEMBER 31, 1993
Exhibit Page:
- - -------
(23) Consents of Independent Auditors
23.1 Consent of Ernst & Young
23.2 Consent of Coopers & Lybrand
(24) Powers of Attorney
(A) Exhibits incorporated by reference are listed in Item 14(a)3 of this
report.
91
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Number 33-71578) pertaining to the Employee New Stock Purchase Plan, as
amended, the Registration Statement (Form S-8 Number 33-71580 and 33-35640)
pertaining to the 1990 Amended and Restated Stock Option Plan, as amended, the
Registration Statement (Form S-8 Number 33-71484) pertaining to the 1993 Stock
Option Plan for Outside Directors, the Registration Statement (Form S-8 Number
33-17194) pertaining to the 1985 Restricted Value Stock Plan, as amended and the
Registration Statement (Form S-2 Number 33-32979) pertaining to the Executive
Supplemental Deferred Compensation Plan of Grubb & Ellis Company and
Subsidiaries of our report dated March 29, 1994, with respect to the financial
statements and schedules of Grubb & Ellis Company and Subsidiaries included in
the Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended December
31, 1993, filed with the Securities Exchange Commission.
/s/ Ernst & Young
San Francisco, California
July 21, 1994
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated March 27, 1992,
except as to the information presented in Schedule VIII, for which the date is
December 24, 1992, on our audits of the consolidated statements of operations,
stockholders' equity and cash flows and financial statement schedules of
Grubb & Ellis Company and Subsidiaries for the year ended December 31, 1991,
which report is included in the Annual Report on Form 10-K and 10-K/A (Amendment
No. 2), in the registration statements of Grubb & Ellis Company and Subsidiaries
as follows:
Form S-8: The 1985 Restricted Value Stock Plan and the
1987 Hamilton Purchase Stock Plan (File No.
33-17194).
Form S-2: The Deferred Equity Program for Commissioned
Salespersons (File No. 33-32979).
Form S-8: The 1990 Amended and Restated Stock Option
Plan, As Amended (File No. 33-71580 and 33-
35640).
Form S-8: The 1993 Stock Option Plan for Outside
Directors (File No. 33-71484).
Form S-8: Employee New Stock Purchase Plan, As Amended
(File No. 33-71578).
COOPERS & LYBRAND
San Francisco, California
July 21, 1994
